PROASSURANCE 2017 ANNUAL REPORT Our Policy: Value2017 annual report® ® 100 Brookwood PlaceBirmingham, Alabama 35209205-877-4400 • 800-282-6242www.ProAssurance.com® PROASSURANCE 2017 ANNUAL REPORT 100 Brookwood PlaceBirmingham, Alabama 35209205-877-4400 • 800-282-6242www.ProAssurance.com® INVESTOR INFORMATIONThere were 53,593,043 shares of ProAssurance Corporation common stock outstanding at March 15, 2018. On that date, we had 2,667 shareholders of record. Our common stock trades on The New York Stock Exchange under the symbol PRA. The price of our stock is available from any website that provides stock quotes. We also post the price of our stock on our website, www.ProAssurance.com.YOUR SHARESIf you hold your shares through a brokerage account, your broker or a customer service representative at that firm should be able to answer questions about your holdings.If you hold your shares in certificate form, or have shares held in direct registration (DRS), you are a “registered holder.” Registered holders may contact our transfer agent, Computershare, for address changes, transfer of certificates, and replacement of share certificates that have been lost or stolen. You may reach Computershare in a variety of ways: DIRECT DEPOSIT OF DIVIDENDS FOR REGISTERED HOLDERS We encourage registered holders to have dividends deposited directly into a designated account to ensure prompt, secure delivery of your funds. You may arrange for Direct Deposit by updating your banking details with Computershare (www-us.computershare.com/Investor/myProfile) once you have established online access to your account with Computershare.CORPORATE GOVERNANCE AND COMPLIANCE WITH REGULATORY AND NEW YORK STOCK EXCHANGE REQUIREMENTSWe invite you to visit the Investor Relations and Corporate Governance sections of our website, http://investor.proassurance.com. There you will find important information about our Company, including our Corporate Governance Principles and Code of Ethics and Conduct, which were developed and adopted by our Board of Directors. The Governance section of our website (http://investor.proassurance.com/govdocs) also pro-vides copies of the Board-adopted charters for our Audit, Compensation, and Nominating/Corporate Governance Committees and our Internal Audit Charter. Our Corporate Governance section also provides information such as stock ownership guidelines, committee composition and lead-ership, and director independence, including categorical standards to assist in determining independence.Our filings with the Securities and Exchange Commission (SEC) are available in the Investor Relations section of our website (http://investor.proassurance.com/Docs). Our SEC filings are also available in the EDGAR section of the SEC’s website (www.sec.gov/edgar.shtml).W. Stancil Starnes, our Chief Executive Officer, submitted the required Section 12(a) CEO Certification to the New York Stock Exchange on June 6, 2017. Additionally, we have been timely in the filing of CEO/CFO certifications as required in Section 302 of the Sarbanes-Oxley Act. These certifications are published as exhibits in our Form 10-K filed with the SEC on February 21, 2018.INVESTOR RELATIONSThe Investor Relations section of our website (http://inves-tor.proassurance.com) also contains detailed financial information, a dividend payment history, SEC filings, the latest news releases about the Company and our latest presentation materials. We also maintain an archive of presentation materials, although you should realize that archived information, by its very nature, may no longer be accurate.OBTAINING INFORMATION DIRECTLY FROM PROASSURANCEAny of the documents mentioned above may be obtained from our Communications and Investor Relations Department using one of the contact methods below:BY EMAIL:Investor@ProAssurance.comBY U. S. POSTAL SERVICE: ProAssurance CorporationInvestor RelationsP. O. Box 590009Birmingham, AL 35259-0009BY PHONE OR FAX:Phone: (205) 877-4400 • (800) 282-6242Fax: (205) 802-4799ANNUAL MEETINGThe 2018 Annual Meeting is scheduled for 9:00 AM CDT on Wednesday, May 23, 2018 at the headquarters of ProAssurance Corporation, 100 Brookwood Place, Birmingham, Alabama 35209.By Mail ComputershareP. O. Box 30170 College Station, TX 77842By InternetInformation about your account including share transfer, direct deposit of dividends and your dividend payment history www-us.computershare.com/Investor. Immediate access to tax forms www-us.computershare.com/investor/QuickTax For technical assistance with the Computershare website, please phone (800) 942-5909.211 Quality Circle, Suite 210College Station, TX 77845By Phone(800) 851-4218 or (201) 680-6578Income Statement HighlightsGross premiums writtenNet premiums earnedTotal revenues Net losses and loss adjustment expenses Net income (2)Operating income (3)Balance Sheet HighlightsTotal investments Total assets (4)Reserve for losses and loss adjustment expensesDebt(4) Total liabilities (4)(1) Includes acquired entities since date of acquisition only.(2) Includes a gain on acquisition of $32.3 million for the year ended December 31, 2013. (3) A reconciliation of Net income to Non-GAAP operating income is provided in Appendix A to the ProAssurance Form 10K included with this mailing to shareholders.(4) For all periods presented, Debt is shown net of unamortized Debt issuance costs which were previously reported as a part of Other assets. 2014$ 779,609 $ 669,731$ 852,326$ 363,084 $ 196,565$ 186,612 $4,009,707 $5,167,375$2,058,266$ 248,215 $3,009,431 2015$ 812,218 $ 694,149 $ 772,079 $ 410,711 $ 116,197 $ 142,629 $3,650,130 $4,906,021$2,005,326 $ 347,858 $2,947,667 2016 $ 835,014 $ 733,281$ 870,214$ 443,229 $ 151,081 $ 129,844 $3,925,696 $5,065,181$1,993,428$ 448,202 $3,266,479 2017 $ 874,876 $ 738,531$ 866,149$ 469,158 $ 107,264 $ 108,538 $3,686,528 $4,929,197 $2,048,381 $ 411,811 $3,334,402 2013$ 567,547 $ 527,919 $ 740,178$ 224,761$ 297,523$ 221,097 $3,941,045 $5,147,794$2,072,822$ 247,695 $2,753,380FISCAL YEARS ENDED DECEMBER 31Financial Highlights(1)®(in thousands) Value is the intrinsic promise that ProAssurance makes to our shareholders, our insureds, our distribution partners, and our colleagues.For our shareholders, that promise means we will continue managing ProAssurance to ensure that we are building long-term value by emphasizing consistent profitability that rewards those who invest alongside us.For our policyholders, that dedication to long-term financial stability and excellence in our operations ensures we can deliver the true value of ProAssurance: An unquestioned promise of vital insurance protec-tion. This unwavering dedication enhances the value that our policyholders and our distribution partners find in our financial strength, deep expertise, broad geographic reach, and breadth of product offerings. Together, they cement our standing as a market leader.Importantly, this commitment to long-term value has allowed us to post a remarkable record of higher returns across several insurance cycles and provided a 12.4% total return to our shareholders in 2017.Driving much of that return was the $316.9 million we returned to shareholders through regular and special dividends. All told, in the past decade we have returned almost $2 billion to shareholders through dividends and share repurchases, even as we have deployed another $754 million in acquisitions that have given us the unmatched capabilities we need to compete in the future. These strategic acquisitions have expanded our geographic presence and product offerings, solidifying the ProAssurance name as an essential provider of vital risk solutions in the rapidly changing landscapes of the markets we serve.Our commitment to effective capital management will remain unchanged, even as the level of capital returned over the past ten years makes it more important than ever that we take into account the need to retain capital to support our business and maintain the capital adequacy demanded by rating agencies and regulators. I must stress that putting that capital to work in our business remains our preference for capital deployment. We are somewhat optimistic that we will be able to do just that in the coming years. There are signs of an improving pricing environment on the Our Policy: Values 1W. Stancil Starnes, Chairman and Chief Executive OfficerTO MY FELLOW SHAREHOLDERS horizon in healthcare liability, and we have ample opportunity to write more business within our workers’ compensation footprint.Our overall performance affirms the strategies we developed more than a decade ago as we began the successful transformation of ProAssurance from a physician-focused medical liability insurer to a healthcare-focused specialty insurer. In those ten-plus years, through carefully considered acquisitions and internal product development, we have positioned ProAssurance as a market leader, capable of providing the broadest range of innovative coverages.Corporately, gross premiums written were approximately $40 million higher than in 2016, with each operating segment reporting an increase while maintaining the underwriting and pricing discipline that has driven our long-term profit-ability. Across our operating segments, our coordinated sales and marketing efforts generated $16.3 million of gross premiums in 2017. Not only does this support our growth, it also provides new ways for carefully selected distribution partners to be a value-added partner to our insureds.All of this success fuels the engagement and dedication of the approximately 1,000 colleagues who work alongside me to make ProAssurance a leader in each of our lines of insurance. Their justifiable certainty that they are doing vital work for those we serve adds value to their lives and enhances the results of each of our operating segments.SPECIALTY P&C SEGMENTWe grew the business in our largest segment, Specialty P&C, by 2.5% year-over-year despite strong, often price-based, competition. The keys to this growth were strong new business writings of $48.5 million, coupled with impressive retention of existing business. In the physicians’ line, the largest component of this segment, premium retention was 90% for the year, up two points. Retention in our healthcare facilities’ line, an important growth area for us, was 86%, a seven point increase over the prior year. Retention in all of the other lines in Specialty P&C was greater than or equal to 2016.ProAssurance’s ability to retain the well-underwritten business already on our books underscores the value we provide insureds. We believe that our success at renewing business in the face of pervasive, price-based competition demonstrates that our insureds understand how our ability to innovate and offer customized policies, provide superior claims results, and deliver cutting-edge risk management strategies sets ProAssurance apart from the competition.In addition to retaining existing business, our ability to appropriately price the risk exposures we face improved during the year. All of the lines we write in Specialty P&C increased pricing on renewal business year-over-year, with healthcare facilities, which encompass the larger risks we are increasingly targeting, up 8.1%, and physicians, the main source of revenue in the segment, up 1.3%. We believe the coming year will provide an important indication of the direction of this market. Importantly, we achieved these gains without sacrificing the underwriting discipline that is a hallmark 2Our commitment to long-term value has allowed us to post a remarkable record of higher returns across several insurance cycles and provided a 12.4% total return to our shareholders in 2017.TOTAL RETURNAt Each Year-end‘92‘95‘98‘02‘04‘07‘10‘13‘1647%950%139%502%236%648%1059%1948%2897%3270%Source: SNL‘17 3of ProAssurance, and we are finding new ways to apply the same discipline as the type of risks we write are evolving and are now larger and more complex than even five years ago.Consolidation in the healthcare industry is a natural byproduct of the pressure to reduce costs and maximize efficiency in the delivery of care. These larger, more geographically diverse entities demand greater expertise and a larger balance sheet—they play to our strengths, and they are most often represented by large national brokers. Our sales and marketing efforts have focused on increasing our visibility to these distribution partners, and we believe we are making great strides, having increased broker submissions by 22% in the healthcare line as compared to 2016. While we are devoting great energy to these larger groups, we have maintained the unmatched level of service we have always delivered to individual physicians, small groups, and those facilities that elect to remain independent. Whether written directly or through agents with whom we have a long and vital connection, this important portion of the healthcare professional liability business will have our undiminished attention. Within this segment, we see signs that the healthcare liability market is gradually changing. There are anecdotal reports that claim severity is increasing, particularly for the larger, more complex risks. Given our historical perspective over many insurance cycles, we are adopting a more cautious approach to reserving our healthcare liability business as we watch overall loss trends. We have proven our ability to navigate difficult loss environments, and we believe that any market disruption will create new opportunities for organic growth or M&A. WORKERS’ COMPENSATION SEGMENTEastern, our workers’ compensation specialist, was a significant contributor to ProAssurance’s profitability in 2017, and did so despite intense marketplace competition, including large multi-line carriers that regularly adjust their appetite with the changing insurance cycles. Eastern’s consistency and dedication to its business model, including individual account underwriting in targeted industries, return to wellness strategies, medical cost containment initiatives, exclusive agency partnerships, proactive loss control, and selective geographic territories continue to drive its performance and allow it to outperform the broader workers’ compensation market.For the year, Eastern produced a combined ratio of 91.1%, more than four points lower than 2016, and grew gross premiums written by 6.2% year-over-year. The traditional workers’ compensation book increased 6.3% during 2017, with growth in all five operating regions, and the Alternative Markets book was up 6.1% over the prior year. As in our Specialty P&C segment, Eastern posted solid premium retention in 2017. Overall premium retention for the year was 87%, two points higher than 2016, and indicative of the value that our agency partners and insureds experience in the products and services Eastern delivers. Included in that overall premium retention number was an impressive 92% in Alternative Markets. Renewal pricing decreased 3% during 2017, indicative of the continued competition in the workers’ compensation marketplace, reflective of improved claims trends in recent years. Eastern’s premium growth benefited from the success of two strategic initiatives in 2017. The company completed a renewal rights transaction with Great Falls Insurance Company, a writer of small workers’ compensa-tion accounts based in Maine and also operating in New Hampshire. In addition to the right to renew approx-imately $13.3 million of premium, we retained the team in place at the time of the transaction, giving Eastern a firm foundation from which to expand its product offerings into New England while adding scale to Eastern’s small account book. The Great Falls transaction, which now represents Eastern’s New England region, produced $3.4 million of direct premiums written from the transaction closing in September through December 31, 2017.The second important strategy was the launch of Eastern Specialty Risk during 2017, a new unit offering workers’ compensation products and services to a slightly higher class of risk. Eastern Specialty Risk produced approximately $5 million in premium during 2017 following its launch late in the first quarter. Eastern continues to play a key role in ProAssurance’s coordinated marketing efforts. With the ability to address the two most difficult insurance placements for larger healthcare risks—professional liability and workers’ compensation—we have made ProAssurance more attractive to a broader range of buyers, agents and brokers. Additionally, Eastern continues to penetrate the healthcare market with its core products. Healthcare-related risks increased 12% over 2016, and now represent 23% of Eastern’s book of business, with the majority of that growth from the Alternative Markets business.Eastern provides geographic and product diversification for ProAssurance, and the capabilities Eastern showcases in the Alternative Markets increas-ingly attracts interest from the broker market into which we are eager to continue expanding. In the past two years, we have added several healthcare professional liability risks to existing workers’ compensation captives and have added one medical liability-only captive. Eastern derives significant fee income from the captive arrangements and will sometimes share risk with the captive owners where the risk profile is attractive. LLOYD’S SYNDICATE SEGMENTOur Lloyd’s Syndicate segment was buffeted by the catastrophes that affected the global insurance markets in 2017. While gross premiums written within Syndicate 1729 grew by 7.8%, losses were up 29.6%, largely due to Hurricanes Harvey, Irma and Maria. The growth in premium comes from strong new business writings and volume increases on renewal business, both of which underscore our confidence in the prudent risk selection and careful underwriting employed by Syndicate 1729. The property catastrophe losses experienced by the industry in 2017 appear to be resulting in modest price increases for business placed at Lloyd’s. Starting in 2018, we increased our participation in Syndicate 1729 from 58% to 62% because we remain confident in the long-term prospects for the Syndicate. The team of internationally-focused healthcare under-writers is adding new business, primarily in Australia, Canada, South America and the Middle East.Starting January 1, 2018, Syndicate 1729 will benefit from the addition of specialized, experienced underwriters who are operating alongside Syndicate 1729 as a Special Purpose Arrangement (SPA) designated as Syndicate 6131. ProAssurance has earmarked a portion of the $200 million in capital committed to Lloyd’s to serve as the sole capital provider for the SPA, which is focusing on an estab-lished book of contingency and specialty property business. The business will be written through Syndicate 1729, which will cede 60% back to the SPA.Despite the volatility that the Syndicate’s results will create from time to time, we continue to view this as a wise investment for our long-term future. We believe that, over time, our participation in Syndicate 1729 will allow us greater visibility into potential international insurance opportunities that may provide us with profitable opportunities for growth that will likely be unavailable to many of our domestic competitors.We are understandably excited about the opportunities that lie ahead for ProAssurance, and we are equally mindful of the challenges and obstacles we will encounter. Our confidence in our ability to achieve our goals stems from ProAssurance’s proven ability to leverage the strength of our balance sheet and the expertise of our employees to produce an exceptional suite of products that will create extraordinary value for our insureds, and in turn, deliver outstanding value to our investors. W. Stancil StarnesChairman and Chief Executive Officer4 PositionW. Stancil Starnes, Esq. Chairman and Chief Executive Officer ProAssurance Bruce D. Angiolillo, Esq. Retired Partner Simpson Thacher & Bartlett LLPSamuel A. Di Piazza, Jr. Chairman, Mayo Clinic Board of Trustees, Retired CEO of PricewaterhouseCoopersRobert E. Flowers, M.D. Retired Physician M. James Gorrie President and Chief Executive Officer, Brasfield & Gorrie Ziad R. Haydar, M.D. Chief Clinical Officer Ascension Health John J. McMahon, Jr. Chairman, Ligon Industries Frank A. Spinosa, D.P.M. Practicing Podiatrist Past President of the American Podiatric Medical Assoc.Katisha T. Vance, M.D. Practicing Physician Thomas A. S. Wilson, Jr., M.D. Practicing PhysicianManagement, Non-Independent = N Independent = I Member = M Chairman = C Financial Expert = EIndependenceNIII IIII IIBoard of Directors Audit M C,E MCompensation C M M ExecutiveC M M Nominating & Corporate Governance M M C MExecutive Officers Title Michael L. Boguski, C.P.C.U. President, Eastern Insurance Holdings, Inc. Howard H. Friedman, A.C.A.S., M.A.A.A. President, Healthcare Professional Liability Group Jeffrey P. Lisenby, Esq. Executive Vice President, Corporate Secretary and General Counsel, ProAssurance Corporation Frank B. O’Neil, I.R.C. Senior Vice President and Chief Communications Officer, ProAssurance Corporation Edward L. Rand, Jr. Executive Vice President, Chief Operating Officer and Chief Financial Officer, ProAssurance Corporation President, Medmarc Insurance CompanyRoss E. Taubman, D.P.M. President and Chief Medical Officer, Podiatry Insurance Company of AmericaCOMMITTEES5 INDEX ProAssurance Corporation S&P 500 Index Russell 2000 Index SNL Insurance P&C 12/31/12 100.00 100.00 100.00 100.00 Total Return Performance12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 Stock Price Performance You may use the following information to compare the market value of our Common Stock with other public companies and public companies in the insurance industry. The graph sets forth the cumulative total shareholder return of our stock during the five years ended December 31, 2017, as well as the cumulative total shareholder return of overall stock market index (the Russell 2000) and a peer group index (the SNL Property & Casualty Insurance Index) for the five years ended December 31, 2017. We have included the Standard & Poor’s 500 Index in this graph because we believe it is a more recognizable broad index and yields a more meaningful comparison for investors given our market capitalization and dividend payout ratio.12/31/13 117.46 132.39 138.82 132.4812/31/14 119.04 150.51 145.62 152.1512/31/15 134.02 152.59 139.19157.3912/31/16 171.92 170.84 168.85 185.7512/31/17 177.64208.14193.58212.37 150100ProAssurance®, Eastern Alliance®, Inova®, Medmarc®, ProAssurance Risk SolutionsSM, Treated Fairly®, and the “Curl” device are registered trademarks of ProAssurance Corporation or its subsidiaries. CAPAssuranceSM is a registered trademark of the Cooperative of American Physicians, Inc. and is used by permission. All Rights Reserved.250200XXXXX50PERIOD ENDINGX® 6XSource: S&P Global Market Intelligence © 2017 United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required]
for the fiscal year ended December 31, 2017,
or
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required]
for the transition period from to .
Commission file number: 001-16533
ProAssurance Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State of
incorporation or organization)
100 Brookwood Place,
Birmingham, AL
(Address of principal executive offices)
63-1261433
(I.R.S. Employer
Identification No.)
35209
(Zip Code)
(205) 877-4400
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Name of Each Exchange On Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
No
No
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
No
No
Large accelerated filer
Non-accelerated filer
Emerging growth company
(Do not check if a smaller reporting company)
Smaller reporting company
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of voting stock held by non-affiliates of the registrant at June 30, 2017 was $3,178,564,902.
As of February 16, 2018, the registrant had outstanding approximately 53,457,021 shares of its common stock.
1
Documents incorporated by reference in this Form 10-K
(i)
The definitive proxy statement for the 2018 Annual Meeting of the Stockholders of ProAssurance Corporation
(File No. 001-16533) is incorporated by reference into Part III of this report.
2
When the following terms and acronyms appear in the text of this report, they have the meanings indicated below.
Glossary of Terms and Acronyms
Term
ACA
ALAE
AOCI
BEAT
Board
BOLI
CIMA
Council of Lloyd's
COSO
Commutation
DDR
Dodd-Frank Act
DPAC
Eastern Re
EBUB
ERM
FAL
FASB
FHLB
FHLMC
FIO
FNMA
GAAP
GNMA
HCPL
IBNR
IRS
LAE
LIBOR
LLC
Lloyd's
LP
Meaning
The Affordable Care Act
Allocated loss adjustment expense
Accumulated other comprehensive income (loss)
Base erosion anti-abuse tax
Board of Directors of ProAssurance Corporation
Business owned life insurance
Cayman Islands Monetary Authority
The governing body for Lloyd's of London
Committee of Sponsoring Organizations of the Treadway Commission
An agreement between a ceding insurer and the reinsurer that provides for the
valuation, payment, and complete discharge of all obligations between the parties
under a particular reinsurance contract
Death, disability and retirement
The Dodd-Frank Wall Street Reform and Consumer Protection Act
Deferred policy acquisition costs
Eastern Re, LTD, S.P.C.
Earned but unbilled premium
Enterprise Risk Management
Funds at Lloyd's
Financial Accounting Standards Board
Federal Home Loan Bank
Federal Home Loan Mortgage Corporation
Federal Insurance Office
Federal National Mortgage Association
Generally accepted accounting principles in the United States of America
Government National Mortgage Association
Healthcare professional liability
Incurred but not reported
Internal Revenue Service
Loss adjustment expense
London Interbank Offered Rate
Limited liability company
Lloyd's of London market
Limited partnership
Medical technology liability
Model Holding Co. Law
Medical technology and life sciences products liability
Model Insurance and Holding Company System Regulatory Act and Regulation
NAIC
NAV
NFIP
NOL
NRSRO
NYDFS
NYSE
National Association of Insurance Commissioners
Net asset value
National Flood Insurance Program
Net operating loss
Nationally recognized statistical rating organization
New York Department of Financial Services
New York Stock Exchange
3
Term
OCI
ORSA
OTTI
PCAOB
ProAssurance Plan
ProAssurance Savings Plan
Revolving Credit Agreement
ROE
SAB
SAP
SEC
SPA
SPC
Specialty P&C
Syndicate 1729
Syndicate 6131
Syndicate Credit Agreement
TCJA
TRIA
U.K.
ULAE
VIE
Meaning
Other comprehensive income (loss)
Risk Management and Own Risk and Solvency Assessment Model Act
Other-than-temporary impairment
Public Company Accounting Oversight Board
Non-qualified deferred compensation plan
Defined contribution savings and retirement plan
ProAssurance's $250 million revolving credit agreement
Return on equity
Staff Accounting Bulletin, which reflects the SEC staff's views regarding accounting-
related disclosure practices
Statutory accounting principles
Securities and Exchange Commission
Special Purpose Arrangement
Segregated portfolio cell
Specialty Property and Casualty
Lloyd's of London Syndicate 1729
Lloyd's of London Syndicate 6131, a Special Purpose Arrangement with Lloyd's of
London Syndicate 1729
Unconditional revolving credit agreement with the Premium Trust Fund of Syndicate
1729
Tax Cuts and Jobs Act H.R.1 of 2017
Federal Terrorism Risk Insurance Act
United Kingdom of Great Britain and Northern Ireland
Unallocated loss adjustment expense
Variable interest entity
4
TABLE OF CONTENTS
PART I
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Directors, Executive Officers and Corporate Governance of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
8
30
31
32
120
123
123
123
123
125
125
125
125
125
126
5
General Information
Throughout this report, references to ProAssurance, “we,” “us,” “our” or "the Company" refer to ProAssurance
Corporation and its consolidated subsidiaries. Because ProAssurance is an insurance holding company and certain terms and
phrases common to the insurance industry are used in this report that carry special and specific meanings, we encourage you to
read the Glossary of Selected Insurance and Related Financial Terms posted on our website on the Investor Relations page
under Other Information (www.proassurance.com/glossary).
Caution Regarding Forward-Looking Statements
Any statements in this Form 10-K that are not historical facts are specifically identified as forward-looking statements.
These statements are based upon our estimates and anticipation of future events and are subject to significant risks, assumptions
and uncertainties that could cause actual results to vary materially from the expected results described in the forward-looking
statements. Forward-looking statements are identified by words such as, but not limited to, "anticipate," "believe," "estimate,"
"expect," "hope," "hopeful," "intend," "likely," "may," "optimistic," "possible," "potential," "preliminary," "project," "should,"
"will" and other analogous expressions. There are numerous factors that could cause our actual results to differ materially from
those in the forward-looking statements. Thus, sentences and phrases that we use to convey our view of future events and
trends are expressly designated as forward-looking statements as are sections of this Form 10-K that are identified as giving our
outlook on future business.
Forward-looking statements relating to our business include among other things: statements concerning future liquidity
and capital requirements, investment valuation and performance, return on equity, financial ratios, net income, premiums,
losses and loss reserve, premium rates and retention of current business, competition and market conditions, the expansion of
product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance,
actions by regulators and rating agencies, court actions, legislative actions, payment or performance of obligations under
indebtedness, payment of dividends and other matters.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other
things, the following factors that could affect the actual outcome of future events:
changes in general economic conditions, including the impact of inflation or deflation and unemployment;
our ability to maintain our dividend payments;
regulatory, legislative and judicial actions or decisions that could affect our business plans or operations;
the enactment or repeal of tort reforms;
formation or dissolution of state-sponsored insurance entities providing coverages now offered by ProAssurance
which could remove or add sizable numbers of insureds from or to the private insurance market;
changes in the interest and tax rate environment;
resolution of uncertain tax matters and changes in tax laws, including the impact of the TCJA;
changes in U.S. laws or government regulations regarding financial markets or market activity that may affect the
U.S. economy and our business;
changes in the ability of the U.S. government to meet its obligations that may affect the U.S. economy and our
business;
performance of financial markets affecting the fair value of our investments or making it difficult to determine the
value of our investments;
changes in requirements or accounting policies and practices that may be adopted by our regulatory agencies, the
FASB, the SEC, the PCAOB or the NYSE that may affect our business;
changes in laws or government regulations affecting the financial services industry, the property and casualty
insurance industry or particular insurance lines underwritten by our subsidiaries;
the effect on our insureds, particularly the insurance needs of our insureds, and our loss costs, of changes in the
healthcare delivery system and/or changes in the U.S. political climate that may affect healthcare policy or our
business;
consolidation of our insureds into or under larger entities which may be insured by competitors, or may not have a
risk profile that meets our underwriting criteria or which may not use external providers for insuring or otherwise
managing substantial portions of their liability risk;
uncertainties inherent in the estimate of our loss and loss adjustment expense reserve and reinsurance recoverable;
changes in the availability, cost, quality or collectability of insurance/reinsurance;
the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
6
effects on our claims costs from mass tort litigation that are different from that anticipated by us;
allegations of bad faith which may arise from our handling of any particular claim, including failure to settle;
loss or consolidation of independent agents, agencies, brokers or brokerage firms;
changes in our organization, compensation and benefit plans;
changes in the business or competitive environment may limit the effectiveness of our business strategy and impact
our revenues;
our ability to retain and recruit senior management;
the availability, integrity and security of our technology infrastructure or that of our third-party providers of
technology infrastructure, including any susceptibility to cyber-attacks which might result in a loss of information or
operating capability;
the impact of a catastrophic event, as it relates to both our operations and our insured risks;
the impact of acts of terrorism and acts of war;
the effects of terrorism-related insurance legislation and laws;
guaranty funds and other state assessments;
our ability to achieve continued growth through expansion into new markets or through acquisitions or business
combinations;
changes to the ratings assigned by rating agencies to our insurance subsidiaries, individually or as a group;
provisions in our charter documents, Delaware law and state insurance laws may impede attempts to replace or
remove management or may impede a takeover;
state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment
securities, from being used for general corporate purposes;
taxing authorities can take exception to our tax positions and cause us to incur significant amounts of legal and
accounting costs and, if our defense is not successful, additional tax costs, including interest and penalties; and
expected benefits from completed and proposed acquisitions may not be achieved or may be delayed longer than
expected due to business disruption; loss of customers, employees or key agents; increased operating costs or
inability to achieve cost savings; and assumption of greater than expected liabilities, among other reasons.
Additional risks, assumptions and uncertainties that could arise from our membership in the Lloyd's of London market
and our participation in Lloyd's Syndicates include, but are not limited to, the following:
members of Lloyd's are subject to levies by the Council of Lloyd's based on a percentage of the member's
underwriting capacity, currently a maximum of 3%, but can be increased by Lloyd's;
Syndicate operating results can be affected by decisions made by the Council of Lloyd's which the management of
Syndicate 1729 and Syndicate 6131 have little ability to control, such as a decision to not approve the business plan
of Syndicate 1729 or Syndicate 6131, or a decision to increase the capital required to continue operations, and by our
obligation to pay levies to Lloyd's;
Lloyd's insurance and reinsurance relationships and distribution channels could be disrupted or Lloyd's trading
licenses could be revoked making it more difficult for a Lloyd's Syndicate to distribute and market its products;
rating agencies could downgrade their ratings of Lloyd's as a whole; and
Syndicate 1729 and Syndicate 6131 operations are dependent on a small, specialized management team and the loss
of their services could adversely affect the Syndicate’s business. The inability to identify, hire and retain other highly
qualified personnel in the future, could adversely affect the quality and profitability of Syndicate 1729’s or Syndicate
6131's business.
Our results may differ materially from those we expect and discuss in any forward-looking statements. The principal risk
factors that may cause these differences are described in “Item 1A, Risk Factors” in this report.
We caution readers not to place undue reliance on any such forward-looking statements, which are based upon conditions
existing only as of the date made, and advise readers that these factors could affect our financial performance and could cause
actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in
any current statements. Except as required by law or regulations, we do not undertake and specifically decline any obligation to
publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
7
ITEM 1. BUSINESS
Overview
PART I
ProAssurance Corporation is a holding company for property and casualty insurance companies. For the year ended
December 31, 2017, our net premiums written totaled $764 million, and at December 31, 2017 we had Total Assets of $4.9
billion and $1.6 billion of Shareholders' Equity.
Our Mission
We exist to Protect Others
Our Vision
We will be the best in the world at understanding and providing solutions for the risks our customers
encounter as healers, innovators, employers and professionals. Through an integrated family of specialty
companies, products and services, we will be a trusted partner enabling those we serve to focus on their
vital work. As the employer of choice, we embrace every day as a singular opportunity to reach for
extraordinary outcomes, build and deepen superior relationships, and accomplish our mission with
infectious enthusiasm and unbending integrity.
Our wholly owned insurance subsidiaries provide professional liability insurance for healthcare professionals and
facilities, professional liability insurance for attorneys, liability insurance for medical technology and life sciences risks and
workers' compensation insurance. We are also the majority capital provider for Syndicate 1729 which writes a range of property
and casualty insurance and reinsurance lines. In addition, we are the sole (100%) capital provider of a newly formed SPA,
Syndicate 6131, which began active operations in 2018 and focuses on contingency and specialty property business.
Our executive offices are located at 100 Brookwood Place, Birmingham, Alabama 35209 and our telephone number is
(205) 877-4400. Our stock trades on the NYSE under the symbol “PRA.” Our website is www.proassurance.com and we
maintain a dedicated Investor Relations section on that website (investor.proassurance.com) to provide specialized resources for
investors and others seeking to learn more about us.
As part of our disclosure through the Investor Relations section of our website, we publish our annual report on Form 10-
K, our quarterly reports on Form 10-Q and our current reports on Form 8-K and all other public SEC filings as soon as
reasonably practical after filing with the SEC on its EDGAR system. These SEC filings can be found on our website at
investor.proassurance.com/Docs. This section also includes information regarding stock trading by corporate insiders by
providing access to SEC Forms 3, 4 and 5 when they are filed with the SEC. In addition to federal filings on our website, we
make available other documents that provide important additional information about our financial condition and operations.
Documents available on our website include the financial statements we file with state regulators (compiled under SAP as
required by regulation), news releases that we issue, a listing of our investment holdings and certain investor presentations. The
Governance section of our website provides copies of the charters for our governing committees and many of our governing
policies. Printed copies of these documents may be obtained from Frank O’Neil, Senior Vice President, ProAssurance
Corporation, either by mail at P.O. Box 590009, Birmingham, Alabama 35259-0009, or by telephone at (205) 877-4400 or
(800) 282-6242.
Our History
We were incorporated in Delaware in 2001 as the successor to Medical Assurance, Inc. in conjunction with its merger
with Professionals Group, Inc. ProAssurance has a history of growth through acquisitions. Acquisitions completed in the most
recent five years include:
• Medmarc Mutual Insurance Company and subsidiaries, acquired January 1, 2013, and
• Eastern Insurance Holdings, Inc., acquired January 1, 2014.
We provided the majority of the capital for the newly formed Syndicate 1729 in November 2013, and Syndicate 1729
began active operations effective January 1, 2014. We provided 100% of the capital for the newly formed SPA, Syndicate 6131,
in December 2017, and Syndicate 6131 began active operations effective January 1, 2018.
Our Strategy
Our main business objective is to generate attractive total return for our shareholders. The basic components of our
strategy for achieving this objective are as follows:
• Provide specialized healthcare-centric expertise to meet evolving demands in the healthcare marketplace. Through
our focus on healthcare, we provide traditional liability insurance products to healthcare providers. We also
leverage our reach, expertise and financial strength to provide innovative and customized products to meet the risk
management needs of larger healthcare organizations or groups.
8
• Provide superior workers' compensation products and services. We provide unique workers' compensation
products and services that focus on increasing an organization's productivity while reducing costs. We do this by
providing innovative programs and solutions that address the specific needs of our customers and return injured
workers to wellness.
• Effectively manage capital. We carefully monitor use of our capital and consider various options for capital
deployment, such as business expansion by our existing subsidiaries, opportunities that arise for mergers or
acquisitions, share repurchases and payment of dividends.
• Pursue profitable underwriting opportunities. We emphasize profitability, not market share. Key elements of our
approach are prudent risk selection using established underwriting guidelines, appropriate pricing and adjusting our
business mix as appropriate to effectively utilize capital and achieve market synergies.
• Emphasize risk management. We seek to reduce risk at the corporate level by actively managing our enterprise risk
and by maintaining strong internal controls. We also emphasize the importance of risk management to our insureds
and offer them training in the use of risk reduction tools and techniques.
• Manage claims effectively. Our experienced claims teams have industry and insurance expertise that, with our
extensive local knowledge, allows us to resolve claims in an effective manner, considering the circumstances of
each claim. When practical, we utilize formalized claims management processes and protocols as a means of
reducing claim costs.
• Provide superior customer service. Our mission statement, "We exist to Protect Others," goes hand-in-hand with
our corporate brand promise, "Treated Fairly." Our employees demonstrate our core values of integrity, leadership,
relationships and enthusiasm every day and are focused on meeting the needs of our customers.
• Maintain a conservative investment strategy. We believe that we follow a conservative investment strategy
designed to emphasize the preservation of our capital and provide adequate liquidity for the prompt payment of
claims. Our investment portfolio consists primarily of investment-grade, fixed-maturity securities of short-to
medium-term duration.
• Maintain financial stability. We are committed to maintaining claims paying ratings of "A" or better from major
rating agencies.
Organization and Segment Information
We operate through multiple insurance organizations and report our operating results in four segments, as follows:
• Specialty Property and Casualty Segment - This segment includes our professional liability business and our
medical technology and life sciences business.
• Workers' Compensation Segment - This segment includes our workers' compensation business which we provide
for employers, groups and associations.
• Lloyd's Syndicate Segment - This segment includes operating results from our participation in Lloyd's Syndicates.
• Corporate Segment - This segment includes our investment operations, interest expense and U.S. income taxes, all
of which are managed at the corporate level with the exception of investment assets solely allocated to Lloyd's
Syndicate operations. This segment also includes non-premium revenues generated outside of our insurance
entities and corporate expenses.
Gross Premiums Written
Gross premiums written for the years ended December 31, 2017, 2016 and 2015 were comprised as follows:
($ in thousands)
2017
2016
2015
Year Ended December 31
Specialty P&C (1)
Workers' Compensation
Syndicate 1729 (2)
Inter-segment revenues (2)
Total
$ 549,323
263,391
63% $ 535,725
30%
247,940
64% $ 526,296
30%
243,608
70,224
(8,062)
$ 874,876
8%
(1%)
65,157
(13,808)
100% $ 835,014
8%
56,929
(14,615)
100% $ 812,218
(2%)
65%
30%
7%
(2%)
100%
(1) Primarily comprised of one-year term policies, but includes premium related to policies with a two-year term of $27.4 million in 2017,
$21.9 million in 2016 and $29.7 million in 2015.
(2) Our written premium includes our 58% share of premiums written by Syndicate 1729, including casualty premium assumed by Syndicate
1729 from our Specialty P&C segment. We eliminate this inter-segment revenue.
9
We do not allocate assets to segments because investments and other assets are not managed at the segment level.
Additional detailed information regarding premium by individual product type within each of our insurance segments is
provided in Item 7, Management's Discussion and Analysis, in the Results of Operations section, under the headings "Premiums
Written."
Our insurance exposures are primarily within the U.S. As a result of our participation in Syndicate 1729, we had net
written premium of $21.3 million in 2017, $12.2 million in 2016 and $4.7 million in 2015 associated with insurance exposures
outside of the U.S.
Specialty Property and Casualty Segment
Professional Liability Insurance
Our professional liability business is primarily focused on providing professional liability insurance to healthcare
providers. We target the full spectrum of the HCPL market, covering multiple categories of healthcare professionals and
healthcare entities, including hospitals and other healthcare facilities. While most of our business is written in the standard
market, we also offer professional liability insurance on an excess and surplus lines basis, and we offer alternative risk and self-
insurance products on a custom basis.
We utilize independent agencies and brokers as well as an internal sales force to write our HCPL business. For the year
ended December 31, 2017, approximately 65% of our HCPL gross premiums written were produced through independent
insurance agencies or brokers. The agencies and brokers we use typically sell through healthcare insurance specialists who are
able to convey the factors that differentiate our professional liability insurance products. In 2017, our ten largest agents or
brokers produced approximately 27% of our HCPL premium; individually, no one agency produced more than 10% of our
HCPL premium.
In marketing our professional liability products we emphasize our financial strength, product flexibility and excellent
claims, underwriting and risk resource services. We market our insurance products through our direct sales force and through
our agents as well as direct mailings and advertising in industry-related publications. We also are involved in professional
societies and related organizations and support legislation that will have a positive effect on healthcare and legal liability issues.
We maintain regional underwriting centers which permit us to consistently provide a high level of customer service to both
small and large accounts.
We maintain claim processing centers where our internal claims personnel investigate and monitor the processing of our
professional liability claims. We engage experienced, independent litigation attorneys in each venue to assist with the claims
process as we believe this practice aids us in providing a defense that is aggressive, effective and cost-efficient. We evaluate the
merit of each claim and determine the appropriate strategy for resolution of the claim, either seeking a reasonable good faith
settlement appropriate for the circumstances of the claim or aggressively defending the claim. As part of the evaluation and
preparation process for HCPL claims, we meet regularly with medical advisory committees in our key markets to examine
claims, attempt to identify potentially troubling practice patterns and make recommendations to our staff.
We also provide professional liability coverage to attorneys, and this is a less significant portion of our business,
accounting for approximately 3% of our 2017 gross premiums written.
During 2016, we expanded our alternative market solutions by writing new healthcare premium in certain SPCs. All or a
portion of the premium written is ceded to Eastern Re, our wholly owned reinsurance subsidiary domiciled in the Cayman
Islands. Total alternative market premium written in this segment during 2017 was approximately $4.3 million of which 100%
was ceded to the SPCs operated through Eastern Re. Our Specialty P&C segment does not currently participate in the cells that
write HCPL premium, and therefore retains no underwriting profit or loss on the business ceded to Eastern Re.
Medical Technology and Life Sciences Insurance
Our medical technology liability business offers products-completed operations liability as well as errors and omissions
liability insurance policies for medical technology and life sciences companies. These companies manufacture or distribute
products that are almost all regulated by the U.S. Food and Drug Administration or similar regulatory authorities in foreign
jurisdictions. Products insured include imaging and non-invasive diagnostic medical devices, orthopedic implants,
pharmaceuticals, clinical lab instruments, medical instruments and surgical supplies, dental products, and animal
pharmaceuticals and medical devices. We also provide coverage for sponsors of clinical trials and contract manufacturers.
Underwriting decisions for our medical technology liability coverages consider the type of risk, the amount of coverage
being sought, the expertise and experience of the applicant, and the expected volume of product sales. Close to 100% of our
medical technology liability business is written through independent brokers. In 2017, our top ten largest brokers generated
approximately 49% of our medical technology liability gross written premium, with no one broker representing more than 14%.
10
We do not appoint agents for our medical technology liability business. We strongly defend our medical technology liability
claims, with a negotiated settlement being the most frequent means of resolution.
Workers' Compensation Segment
Our Workers' Compensation segment offers workers' compensation products in the Mid-Atlantic, Southeast, Midwest,
Gulf South and New England regions of the continental U.S. Our workers' compensation business consists of two major
business activities:
• Traditional workers' compensation insurance coverages provided to employers, generally those with 1,000
employees or less. Types of policies offered include guaranteed cost policies, policyholder dividend policies,
retrospectively-rated policies and deductible policies.
• Alternative market workers’ compensation solutions provided to individual companies, groups and associations
whereby the premium written is 100% ceded to either the SPCs within Eastern Re or to unaffiliated captive
insurers. Of our total alternative market premiums written, approximately 92% in 2017 and 90% in 2016 was ceded
to SPCs operated through Eastern Re. Each SPC is owned, fully or in part, by an agency or insured group or
association, hereafter referred to as cell participants. The SPC is operated solely for the benefit of cell participants
of that particular cell, and the pool of assets of one SPC are statutorily protected from the creditors of any other
SPC. The underwriting results and investment income of the SPCs are shared with the cell preferred shareholders
or participants in accordance with the terms of the cell agreements. We participate as either a preferred shareholder
or participant to a varying degree in the results of certain SPCs. As of December 31, 2017, our ownership interest
in the SPCs in which we participate is as low as 25% and as high as 85%.
All of our workers' compensation products are distributed through a group of appointed independent agents.
We utilize an individual account underwriting strategy for our workers' compensation business that is focused on selecting
quality accounts. The goal of our workers’ compensation underwriters is to select a diverse book of business with respect to risk
classification, hazard level and geographic location. We target accounts with strong return to wellness and safety programs in
primarily low to middle hazard levels such as clerical offices, light manufacturing, healthcare, auto dealers and service
industries and maintain a strong risk management unit in order to better serve our customers' needs. During 2017, we
established our Eastern Specialty Risk unit, which focuses on higher hazard risks in select industries. New business written
totaled $4.6 million in this unit in 2017.
We actively seek to reduce our workers' compensation loss costs by placing a concentrated focus on returning injured
workers to wellness as quickly as possible. We emphasize early intervention and aggressive disability management, utilizing in-
house and third-party specialists for case management, including medical cost management. Strategic vendor relationships have
been established to reduce medical claim costs and include preferred provider, physical therapy, prescription drug and
catastrophic medical services.
Lloyd's Syndicate Segment
Our Lloyd's Syndicate segment includes operating results from our participation in Lloyd's of London Syndicates. The
results of this segment are normally reported on a quarter delay, except when information is available that is material to the
current period. Furthermore, investment results associated with investment assets solely allocated to Lloyd's Syndicate
operations and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier
time frame. We have a total capital commitment to support Syndicate 1729 and Syndicate 6131 through 2022 of up to $200
million. For the 2018 underwriting year, we have satisfied our capital commitment with investment securities deposited with
Lloyd's which at December 31, 2017 had a fair value of approximately $123.9 million.
Lloyd's Syndicate 1729
We are the majority (58%) capital provider to Syndicate 1729 with the remaining capital provided by unrelated third
parties, including private names and other corporate members. For the 2018 underwriting year, we increased our participation
in the operating results of Syndicate 1729 from 58% to 62%. Syndicate 1729 covers a range of property and casualty insurance
and reinsurance lines, primarily for risks within the U.S., and for the 2018 underwriting year has a maximum underwriting
capacity of £132 million (approximately $178.4 million at December 31, 2017), of which £82 million (approximately $110.8
million at December 31, 2017) is our allocated underwriting capacity as a corporate member.
Lloyd's Syndicate 6131
Beginning in 2018, our Lloyd's Syndicate segment will include the operating results of a newly formed SPA, Syndicate
6131. A Lloyd's SPA is only allowed to underwrite one quota share reinsurance contract with another Lloyd's syndicate, which
in this arrangement is Syndicate 1729. We are the sole (100%) capital provider to Syndicate 6131 which will focus on
contingency and specialty property business. For the 2018 underwriting year, Syndicate 6131 has a maximum underwriting
capacity of £8 million (approximately $10.8 million at December 31, 2017).
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Corporate Segment
Our Corporate segment includes investment operations managed at the corporate level, except investment assets solely
allocated to Lloyd's Syndicate operations, non-premium revenues generated outside of our insurance entities and corporate
expenses, including interest expense and U.S. income taxes. We apply a consistent management strategy to the entire
investment portfolio managed at the corporate level. Accordingly, we report those investment results and net realized
investment gains and losses within our Corporate segment. Our overall investment strategy is to maximize current income from
our investment portfolio while maintaining safety, liquidity, duration targets and portfolio diversification. The portfolio is
generally managed by professional third-party asset managers whose results we monitor and evaluate. The asset managers
typically have the authority to make investment decisions within the asset classes they are responsible for managing, subject to
our investment policy and oversight, including a requirement that available-for-sale securities in a loss position cannot be sold
without specific authorization from us. See Note 3 of the Notes to Consolidated Financial Statements for more information on
our investments.
Competition
The marketplace for all our lines of business is very competitive. Within the U.S. our competitors are primarily domestic
insurance companies and range from large national insurers whose financial strength and resources may be greater than ours to
smaller insurance entities that concentrate on a single state and as a result have an extensive knowledge of the local markets.
Additionally, there are many providers, domestic and international, of alternative risk management solutions. Syndicate 1729
and Syndicate 6131, which are based in the U.K., face significant competition from other Lloyd's syndicates as well as other
international and domestic insurance and reinsurance firms operating in the country of the insured. Competitive distinctions
include pricing, size, name recognition, service quality, market commitment, market conditions, breadth and flexibility of
coverage, method of sale, financial stability, ratings assigned by rating agencies and regulatory conditions.
The changing healthcare environment within the U.S. during the past few years is providing both increased competitive
challenges and opportunities for our largest segment, the Specialty P&C segment. Many physicians now practice as employees
of larger healthcare entities. Further, healthcare services are increasingly provided by professionals other than physicians and
outside of a traditional hospital or clinic setting. Such trends are widely expected to continue. Larger healthcare entities have
customer service and risk management needs that differ from the traditional solo or small physician groups. Larger entities are
more likely to combine risks such as workers' compensation and professional liability when purchasing insurance and are also
more likely to manage all or a part of their risk through alternative insurance mechanisms. We have addressed these issues by
enhancing our existing hospital/physician insurance programs, expanding our coverage of healthcare providers other than
physician or hospitals, expanding our coverages to include workers' compensation and product liability, and by enhancing our
customer service capabilities, particularly with regard to the needs of larger accounts. We have also increased our focus on
offering unique, joint or cooperative insurance programs that are attractive to larger healthcare entities.
The workers’ compensation industry is highly competitive in the geographic markets in which we operate. Price
competition, including the leveraging of workers’ compensation business by multi-line insurers, and the effect of loss cost
reductions in many of the states in which we write business impacted our renewal rates during 2017, and we expect the trend to
continue in 2018. We believe our product offerings allow us to provide flexibility in offering workers’ compensation solutions
to our customers at a competitive price. In addition, we believe that our claims handling and risk management services are
attractive to our customers and provide us with a competitive advantage even when our pricing is higher than our competitors.
For all of our business, we recognize the importance of providing our products at competitive rates, but we do not price
our products at rates that will not permit us to meet our profit targets. We base our rates on current loss projections, maintaining
a long-term focus even when this approach reduces our top line growth. We believe that our size, reputation for effective claims
management, unique customer service focus, multi-state presence and broad spectrum of coverages offered provides us with
competitive advantages, even as the needs of our insureds change.
Rating Agencies
Our claims paying ability is regularly evaluated and rated by three major rating agencies: A.M. Best, Fitch and Moody’s.
In developing their claims paying ratings, these agencies make an independent evaluation of an insurer’s ability to meet its
obligations to policyholders. See "Risk Factors" for a table presenting the claims paying ratings of our principal insurance
operations.
Three rating agencies evaluate and rate our ability to service current debt and potential debt. These financial strength
ratings reflect each agency’s independent evaluation of our ability to meet our obligation to holders of our debt, if any. While
financial strength ratings may be of greater interest to investors than our claims paying ratings, these ratings are not evaluations
of our equity securities nor a recommendation to buy, hold or sell our equity securities.
12
Insurance Regulatory Matters
We are subject to regulation under the insurance and insurance holding company statutes of various jurisdictions,
including the domiciliary states of our insurance subsidiaries and other states in which our insurance subsidiaries do business.
Our insurance subsidiaries are primarily domiciled in the U.S. Our states of domicile include Alabama, Illinois, Michigan,
Pennsylvania and Vermont. Our foreign jurisdictions include our reinsurance operations based in the Cayman Islands, a
territory of the U.K., and, through our participation in Lloyd's Syndicates, our insurance and reinsurance operations based in the
U.K.
United States
Our insurance subsidiaries are required to file detailed annual statements in their states of domicile, with the NAIC and,
in some cases, with the state insurance regulators in each of the states in which they do business. The laws of the various states
establish agencies with broad authority to regulate, among other things, licenses to transact business, premium rates for certain
types of coverage, trade practices, agent licensing, policy forms, underwriting and claims practices, reserve adequacy,
transactions with affiliates and insurer solvency. Such regulations may hamper our ability to meet operating or profitability
goals, including preventing us from establishing premium rates for some classes of insureds that adequately reflects the level of
risk assumed for those classes. Many states also regulate investment activities on the basis of quality, distribution and other
quantitative criteria. States have also enacted legislation, typically based in whole or in part on NAIC model laws, which
regulates insurance holding company systems, including acquisitions, the payment of dividends, the terms of affiliate
transactions, enterprise risk and solvency management, and other related matters.
Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation or reorganization of
insurance companies.
Insurance companies are also subject to state and federal legislative and regulatory measures and judicial decisions.
These could include new or updated definitions of risk exposure and limitations on business practices.
Insurance Regulation Concerning Change or Acquisition of Control
The insurance regulatory codes in each of the domiciliary states of our operating subsidiaries contain provisions (subject
to certain variations) to the effect that the acquisition of “control” of a domestic insurer or of any person that directly or
indirectly controls a domestic insurer cannot be consummated without the prior approval of the domiciliary insurance regulator.
In general, a presumption of “control” arises from the direct or indirect ownership, control or possession with the power to vote
or possession of proxies with respect to 10% (5% in Alabama) or more of the voting securities of a domestic insurer or of a
person that controls a domestic insurer. Because of these regulatory requirements, any party seeking to acquire control of
ProAssurance or any other domestic insurance company, whether directly or indirectly, would usually be required to obtain
such approvals.
In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a
change in control of a non-domestic insurance company admitted in that state. While such pre-acquisition notification statutes
do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the
issuance of a cease and desist order with respect to the non-domestic admitted insurers doing business in the state if certain
conditions exist, such as undue market concentration.
Insurance Regulation Concerning Cybersecurity
In March 2017, new cybersecurity rules took effect for financial institutions, insurers and other companies regulated by
the NYDFS. The NYDFS Cybersecurity Regulation's intent is to encourage the protection of consumer information, as well as
the technology systems of NYDFS regulated entities. We are currently compliant according to the transition periods defined in
the NYDFS Cybersecurity Regulation.
In addition, in October 2017, the NAIC adopted the Insurance Data Security Model Law, which creates rules for insurers,
agents and other licensed entities covering data security and investigation and notification of breach. Such rules include
maintaining an information security program based on an ongoing risk assessment, overseeing third-party service providers,
investigating data breaches and notifying regulators of a cybersecurity event. We expect states, including our states of domicile,
to adopt the NAIC's Insurance Data Security Model Law. We do not expect compliance with the Insurance Data Security Model
Law to have a material impact on our financial condition or results of operations as it closely resembles the NYDFS
Cybersecurity Regulation.
13
Statutory Accounting and Reporting
Insurance companies are required to file detailed quarterly and annual reports with state insurance regulators in their state
of domicile and each of the states in which they do business. Their business and accounts are subject to examination by such
regulators at any time. The financial information in these reports is prepared in accordance with SAP. Insurance regulators
periodically examine each insurer’s adherence to SAP, financial condition and compliance with insurance department rules and
regulations.
Regulation of Dividends and Other Payments from Our Operating Subsidiaries
Our U.S. operating subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of
dividends or distributions an insurance company may pay to its shareholders, including our insurance holding company,
without prior regulatory approval. Generally, dividends may be paid only out of unassigned earned surplus. In every case,
surplus subsequent to the payment of any dividends must be reasonable in relation to an insurance company’s outstanding
liabilities and must be adequate to meet its financial needs.
State insurance holding company regulations generally require domestic insurers to obtain prior approval of extraordinary
dividends. Insurance holding company regulations that govern our principal operating subsidiaries deem a dividend as
extraordinary if the combined dividends and distributions to the parent holding company in any twelve-month period exceed
prescribed thresholds. Such thresholds are statutorily prescribed by the state of domicile and currently are based on either net
income for the prior fiscal year (reduced by realized capital gains in certain domiciliary states) or a percentage of unassigned
surplus at the end of the prior fiscal year, depending upon the wording of the statute.
If insurance regulators determine that payment of a dividend or any other payments within a holding company group,
(such as payments under a tax-sharing agreement or payments for employee or other services) would, because of the financial
condition of the paying insurance company or otherwise, be a detriment to such insurance company’s policyholders, the
regulators may prohibit such payments that would otherwise be permitted.
Risk-Based Capital and Risk Assessment
In order to enhance the regulation of insurer solvency, each state of domicile in accordance with an NAIC-defined
formula specifies risk-based capital requirements for property and casualty insurance companies. At December 31, 2017, all of
ProAssurance’s insurance subsidiaries substantially exceeded the minimum required risk-based capital levels.
In late 2010, the NAIC adopted the Model Holding Co. Law. The Model Holding Co. Law, as compared to previous
NAIC guidance, increases regulatory oversight of and reporting by insurance holding companies, including reporting related to
non-insurance entities, and requires reporting of risks affecting the holding company group. Additionally, in 2012 the NAIC
adopted ORSA, which requires insurers to maintain a framework for identifying, assessing, monitoring, managing and
reporting on the “material and relevant risks” associated with the insurer's (or insurance group's) current and future business
plans. ORSA requires larger insurers, generally those with annual written premium volume greater than $1.0 billion as a group
or $500 million as an individual insurer, to file an internal assessment of solvency with insurance regulators annually beginning
in 2015. Although no specific capital adequacy standard is currently articulated in ORSA, it is possible that such standard will
be developed over time. The Model Holding Co. Law and ORSA will be binding only if adopted by state legislatures and/or
state insurance regulatory authorities and actual regulations adopted by any state may differ from that adopted by the NAIC. As
of December 31, 2017, all states have adopted the Model Holding Co. Law and 48 states have adopted ORSA. ProAssurance
did not meet ORSA filing criteria in 2017.
Also, the NAIC subsequently revised the Model Holding Co. Law to include provisions which allow regulatory
supervision of the holding company group through supervisory colleges and which require reporting of risk and solvency
assessments for the group. Certain states in which we operate adopted these revisions early and we began filing our risk and
solvency assessment in 2014.
Investment Regulation
Our operating subsidiaries are subject to state laws and regulations that require diversification of investment portfolios
and that limit the amount of investments in certain investment categories. Failure to comply with these laws and regulations
may cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in
some instances, would require divestiture of investments. We monitor the practices used by our operating subsidiaries for
compliance with applicable state investment regulations and take corrective measures when deficiencies are identified.
14
Assessment Funds
Admitted insurance companies are required to be members of guaranty associations which administer state guaranty
funds. To fund the payment of claims (up to prescribed limits) against insurance companies that become insolvent, these
associations levy assessments on all member insurers in a particular state on the basis of the proportionate share of the
premiums written by member insurers in the covered lines of business in that state. Maximum assessments permitted by law in
any one year generally vary between 1% and 2% of annual premiums written by a member in that state, although state
regulations may permit larger assessments if insolvency losses reach specified levels. Some states permit member insurers to
recover assessments paid through surcharges on policyholders or through full or partial premium tax offsets, while other states
permit recovery of assessments through the rate filing process. In recent years, participation in guaranty funds has not had a
material effect on our results of operations.
Certain states in which we write workers’ compensation insurance have established administrative and/or second injury
funds that levy assessments against insurers that write business in their state. The assessments are generally based on insurer’s
proportionate share of premiums or losses in a particular state, and the assessment rate can vary from year to year.
Shared Markets
State insurance regulations may force us to participate in mandatory property and casualty shared market mechanisms or
pooling arrangements that provide certain insurance coverage to individuals or other entities that are otherwise unable to
purchase such coverage in the commercial insurance marketplace. Our operating subsidiaries’ participation in such shared
markets or pooling mechanisms is not material to our business at this time.
Federal Regulation
Tort reform proposals are considered from time to time at the federal level. Passage of a federal tort reform package
would likely be subject to judicial challenge and we cannot be certain that it would be upheld by the courts.
The Dodd-Frank Act was enacted in July 2010 and established additional regulatory oversight of financial institutions. To
date, the Dodd-Frank Act has not materially affected our business. However, development of regulations is not complete, and
there could yet be changes in the regulatory environment that affect the way we conduct our operations or the cost of
compliance, or both.
One of the federal government bodies created by the Dodd-Frank Act was the FIO which in December 2013 released a
proposal on insurance modernization and improvement of the system of insurance regulation in the U.S. Although the FIO is
prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance
matters and has limited power to preempt certain types of state insurance laws. The proposal advocates significantly greater
federal involvement in insurance regulation and identifies necessary reforms by the states to preclude further consideration of
direct federal regulation. While the proposal does not necessarily imply that the federal government will displace state
regulation completely, it does recommend more of a hybrid approach to insurance regulation. In response to the FIO proposal,
the NAIC and a number of state legislatures have considered or adopted legislative proposals that alter and, in many cases,
increase the authority of state agencies to regulate insurance companies and insurance holding company systems. We cannot
predict whether the proposals will be adopted or what impact, if any, subsequently enacted laws might have on our business,
financial condition or results of operations.
In June 2017, the U.S. House of Representatives passed the Financial CHOICE Act, which would amend or repeal certain
regulations in the Dodd-Frank Act, specifically modifying provisions related to insurance regulation. Revisions include the
consolidation of two conflicting federal insurance positions into a single position established to advocate for the U.S. insurance
industry at domestic and international levels, while preserving the traditional state-based system of insurance regulation. This
proposed legislation is now being considered by the U.S. Senate. We are unable to predict with any certainty the effect that the
Financial CHOICE Act, if passed, will have on our business.
In June 2012, Congress passed the Biggert-Waters Bill, which provided for a five-year renewal of the NFIP and, among
other things, authorized the Federal Emergency Management Agency to carry out initiatives to determine the capacity of
private insurers, reinsurers, and financial markets to assume a greater portion of the flood risk exposure in the U.S. and to
assess the capacity of the private reinsurance market to assume some of the program’s risk. In August 2017, the President of the
U.S. signed an executive order revoking the establishment of a federal flood risk management standard. In November 2017, the
U.S. House of Representatives adopted a bill to reauthorize the NFIP for five years and implement several reforms, including
provisions designed to spur additional private insurer involvement in covering flood risk, but the U.S. Senate has yet to vote on
the measure. Due to the 2017 hurricane season, Congress adopted a short-term extension to fund the NFIP through January
2018, which lapsed on January 19, 2018. On January 22, 2018, Congress reauthorized the NFIP retroactively by adopting a
short-term extension through February 2018. We cannot predict whether the proposals will be adopted or what impact, if any,
subsequently enacted laws might have on our business, financial condition or results of operations.
15
U.S. Department of the Treasury Report
In February 2017, the President of the U.S. issued an Executive Order that calls for a comprehensive review of laws,
treaties, regulations, policies and guidance regulating the U.S. financial system, and requires the Secretary of the Treasury to
consult with the heads of the member agencies of the Financial Stability Oversight Council to identify any laws, regulations or
requirements that inhibit federal regulation of the financial system in a manner consistent with the core principles identified in
the Executive Order. The Secretary’s report on asset management and insurance was issued in October 2017 and recommended
activities-based evaluations of systemic risk in the insurance industry rather than an entity-based approach. The report also
supported primary regulation of the U.S. insurance industry by the states rather than the federal government. We cannot predict
whether any of the recommendations will ultimately become laws, regulations or other requirements applicable to our business.
U.S. Tax Legislation
On December 22, 2017, the President of the U.S. signed the TCJA into law. The TCJA includes significant changes to the
U.S. corporate income tax system, including a reduction in the federal corporate rate from 35% to 21% beginning after
December 31, 2017, changes to loss reserve discounting factors, limitations on the deductibility of interest expense and
executive compensation, and modifications of the taxation of non-U.S. subsidiaries. Additionally, the TCJA could result in
material uncertainties with respect to estimates made in our provision for income taxes and could materially affect
management’s assessment of the need for a valuation allowance. See further discussion of the impact of the TCJA on our
results of operations and financial position provided in Item 7, Management's Discussion and Analysis, in the Critical
Accounting Estimates section under the heading "Taxes" or Note 5 of the Notes to Consolidated Financial Statements.
Terrorism Risk Insurance Act
TRIA, initially enacted in 2002 and reauthorized in 2007 and 2015, ensures the availability of insurance coverage for
certain acts of terrorism, as defined in the legislation. The 2015 reauthorization extended the program through 2020. TRIA
currently provides that during 2018 a loss event must exceed $160 million to trigger coverage and that the federal government
will reimburse 82% of an insurer’s losses in excess of the insurer’s deductible, up to the maximum annual federal liability of
$100 billion. The event trigger will gradually increase to $200 million by 2020 and the reimbursement percentage will
gradually decline to 80% by 2020. TRIA requires that we offer terrorism coverage to our commercial policyholders in our
workers' compensation line of business, for which we may, when warranted, charge an additional premium. The policyholders
may or may not accept such coverage.
International
Cayman Islands
Our SPC business operates through our subsidiary, Eastern Re, which is organized and licensed as a Cayman Islands
unrestricted Class B insurance company. Eastern Re is subject to regulation by CIMA. Applicable laws and regulations govern
the types of policies that Eastern Re can insure or reinsure, the amount of capital that it must maintain and the way it can be
invested, and the payment of dividends without approval by the CIMA. Eastern Re is required to maintain minimum capital of
approximately $200,000 and must receive approval from the CIMA before it can pay any dividends.
United Kingdom
Syndicate 1729 and Syndicate 6131 are regulated in the U.K. by the Prudential Regulation Authority and the Financial
Conduct Authority. All Lloyd's Syndicates must also comply with the bylaws and regulations established by the Council of
Lloyd's including submission and approval of an annual business plan and maintenance of stipulated capital levels. Also, the
Council of Lloyd's may call or assess a percentage of a member's underwriting capacity (currently a maximum of 3%) as a
contribution to Lloyd's Central Fund, which, similar to state guaranty funds in the U.S., meets policyholder obligations if a
Lloyd's member is otherwise unable to do so.
The European Union's executive body, the European Commission, has implemented new capital adequacy and risk
management regulations called Solvency II that applies to businesses within the European Union. Solvency II became effective
January 1, 2016. Both Syndicate 1729 and Syndicate 6131 follow the Solvency II compliance guidelines set out by the Council
of Lloyd's.
In June 2016, the U.K. approved a referendum to exit the European Union, commonly referred to as "Brexit", which
resulted in volatility in global stock markets and currency exchange rates, and has increased political, economic and global
market uncertainty. The formal process for Brexit was triggered in March 2017 by the filing of a notice to withdraw. The effects
of Brexit will depend in part on any agreements the U.K. makes to retain access to European Union markets either during a
transitional period or more permanently. Brexit could impair or end the ability of Lloyd's Syndicates to transact business in
European Union countries. Until the withdrawal is finalized, Lloyd's is currently permitted to operate without the need for
16
additional licensing or authorization from each individual country. In March 2017, Lloyd's announced that it will be
establishing a new European insurance company in Brussels in order to maintain access to European Union business for the
2019 renewal season, subject to regulatory approval. We cannot predict the nature and extent of the impact that Brexit will have
on regulation, interest rates, currency exchange rates and financial markets.
Enterprise Risk Management
As a large property and casualty insurance provider, we are exposed to many risks stemming from both our insurance
operations and the environments in which we operate. Since certain risks can be correlated with other risks, an event or a series
of events can impact multiple areas of the Company simultaneously and have a material effect on the Company's results of
operations, financial position and/or liquidity. In response to these exposures we have implemented an ERM program. Our
ERM program consists of numerous processes and controls that have been designed by our senior management with oversight
by our Board and implemented across our organization. We utilize ERM to identify potential risks from all aspects of our
operations and to evaluate these risks in a manner that is both prudent and balanced. Our primary objective is to develop a risk
appetite that creates and preserves value for all of our stakeholders.
Employees
At December 31, 2017, we had 994 employees, none of whom were represented by a labor union. We consider our
employee relations to be good.
17
ITEM 1A. RISK FACTORS.
There are a number of factors, many beyond our control, which may cause results to differ significantly from our
expectations. Some of these factors are described below. Any factor described in this report could by itself, or together with one
or more other factors, have a negative effect on our business, results of operations and/or financial condition. There may be
factors not described in this report that could also cause results to differ from our expectations.
Insurance market conditions may alter the effectiveness of our current business strategy and impact our revenues.
The property and casualty insurance business is highly competitive. We compete in a fragmented market comprised of
many insurers, ranging from smaller single state monoline insurers who have an extensive knowledge of local markets to large
national insurers who offer multiple product lines and whose financial strength and resources may be greater than ours. In many
instances, coverage we offer is also available through mutual entities whose ROE objectives may be lower than ours. Also,
there are many opportunities for self-insurance and for participation in an alternative risk transfer mechanism, such as a captive
insurer or a risk retention group.
Competition in the property and casualty insurance business is based on many factors, including premiums charged and
other terms and conditions of coverage, services provided, financial ratings assigned by independent rating agencies, claims
services, reputation, geographic scope, local presence, agent and client relationships, financial strength and the experience of
the insurance company in the line of insurance to be written. Actions of competitors could adversely affect our ability to attract
and retain business at current premium levels, impact our market share and reduce the profits that would otherwise arise from
operations.
Because we are a property and casualty insurer, our business may suffer as a result of unforeseen catastrophe losses.
As a property and casualty insurer we are exposed to claims arising out of catastrophes, primarily through our workers'
compensation and Lloyd's Syndicate operations. Catastrophes can be caused by various events, including hurricanes, tsunamis,
tornadoes, windstorms, earthquakes, hailstorms, explosions, flooding, severe winter weather and fires and may include man-
made events, such as terrorist attacks or a widespread financial crisis. The incidence, frequency and severity of catastrophes are
inherently unpredictable. While we use historical data and modeling tools to assess our potential exposure to catastrophic losses
under various conditions and probability scenarios, such assessments do not necessarily accurately predict future losses or
accurately measure our potential exposure. The extent of losses from a catastrophe is a function of both the total amount of
insured exposure in the area affected by the event and the severity of the event.
Our loss exposure for a terrorist act meeting the TRIA definition is mitigated by our coverage provided by this program as
described in Part I under the heading "Insurance Regulatory Matters." Congress has the ability to alter or repeal the provisions
of TRIA at its discretion, and if altered or repealed our exposure could increase and result in premium increases for those types
of coverages. Workers' compensation coverages cannot exclude damages related to an act of terrorism and if TRIA were
repealed or the benefits were substantially reduced, this might affect our ability to offer these coverages at a reasonable rate.
Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Although we purchase
reinsurance protection for risks we believe bear a significant level of catastrophe exposure, actual losses resulting from a
catastrophic event or events may exceed our reinsurance protection. Furthermore, for significant catastrophic exposure, the
inability or unwillingness of the reinsurer to make timely payments under the terms of the reinsurance agreement could impact
our liquidity. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse
effect on our financial position, results of operations and liquidity.
Our results of operations and financial condition may be affected if actual insured losses differ from our loss reserves or if
actual amounts recoverable under reinsurance agreements differ from our estimated recoverables.
We establish reserves as balance sheet liabilities representing our estimates of amounts needed to resolve reported and
unreported losses and pay related loss adjustment expenses. Our largest liability is our reserve for losses and loss adjustment
expenses. Due to the size of our reserve for losses and loss adjustment expenses, even a small percentage adjustment to our
reserve can have a material effect on our results of operations for the period in which the change is made.
The process of estimating loss reserves is complex. Significant periods of time may elapse between the occurrence of an
insured loss, the reporting of the loss by the insured and payment of that loss. Ultimate loss costs, even for claims with similar
characteristics, can vary significantly depending upon many factors including but not limited to the nature of the claim,
including whether the claim is an individual or a mass tort claim, the personal situation of the claimant or the claimant’s family,
the outcome of jury trials, the legislative and judicial climate where the insured event occurred, general economic conditions
and, for claims involving bodily injury, the trend of healthcare costs. Consequently, the loss cost estimation process requires
actuarial skill and the application of judgment and such estimates require periodic revision. As part of the reserving process, we
18
review the known facts surrounding reported claims as well as historical claims data and consider the impact of various factors
such as:
•
•
•
•
•
•
•
for reported claims, the nature of the claim and the jurisdiction in which the claim occurred;
trends in paid and incurred loss development;
trends in claim frequency and severity;
emerging economic and social trends;
trends in healthcare costs for claims involving bodily injury;
inflation and levels of employment; and
changes in the regulatory, legal and political environment.
This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an
appropriate, but not necessarily accurate, basis for predicting future events. There is no precise method for evaluating the
impact of any specific factor on the adequacy of reserves, and actual results are likely to differ from original estimates. We
evaluate our reserves each period and increase or decrease reserves as necessary based on our estimate of future claims
payments. An increase to reserves has a negative effect on our results of operations in the period of increase; a reduction to
reserves has a positive effect on our results of operations in the period of reduction.
Our loss reserves also may be affected by court decisions that expand liability of our policies after they have been issued.
In addition, a significant jury award or series of awards against one or more of our insureds could require us to pay large sums
of money in excess of our reserved amounts. Due to uncertainties inherent in the jury system, any case that is litigated to a jury
verdict has the potential to incur a loss that has a material adverse effect on our results of operations.
We purchase reinsurance to mitigate the effect of large losses. Our receivable from reinsurers on unpaid losses and loss
adjustment expenses represents our estimate of the amount of our reserve for losses that will be recoverable under our
reinsurance programs. We base our estimate of funds recoverable upon our expectation of ultimate losses and the portion of
those losses that we estimate to be allocable to reinsurers based upon the terms and conditions of our reinsurance agreements.
Given the uncertainty of the ultimate amounts of our losses, our estimates of losses and related amounts recoverable may vary
significantly from the eventual outcome. Also, we estimate premiums ceded under reinsurance agreements wherein the
premium due to the reinsurer, subject to certain maximums and minimums, is based in part on losses reimbursed or to be
reimbursed under the agreement. Due to the size of our reinsurance balances, changes to our estimate of the amount of
reinsurance that is due to us could have a material effect on our results of operations in the period for which the change is
made.
We are exposed to and may face adverse developments involving mass tort claims arising from coverages provided to our
insureds.
Establishing claim and claim adjustment expense reserves for mass tort claims is subject to uncertainties due to many
factors, including expanded theories of liability, geographical location and jurisdiction of the lawsuits. Moreover, it is difficult
to estimate our ultimate liability for such claims due to evolving judicial interpretations of various tort theories of liability and
defense theories, such as federal preemption and joint and several liability, as well as the application of insurance coverage to
these claims.
If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear increased risk or reduce
the level of our underwriting commitments.
As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk
underwritten by our insurance company subsidiaries. Market conditions beyond our control determine the availability and cost
of the reinsurance. We may be unable to maintain current reinsurance coverage or to obtain other reinsurance coverage in
adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or to obtain new reinsurance
coverage, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we
would need to reduce the amount of our underwritten risk.
We cannot guarantee that our reinsurers will pay in a timely fashion or at all and as a result we could experience losses.
We transfer part of our risks to reinsurance companies in exchange for part of the premium we receive in connection with
the risk. Although our reinsurance agreements make the reinsurer liable to us to the extent the risk is transferred, our liability to
our policyholders remains our responsibility. Reinsurers may periodically dispute our demand for reimbursement from them
based upon their interpretation of the terms of our agreements or may fail to pay us for financial or other reasons. If reinsurers
refuse or fail to pay us or fail to pay on a timely basis, our financial results and/or cash flows could be adversely affected and
could have a material effect on our results of operations in the period in which uncollectible amounts are identified.
19
At December 31, 2017 our receivable from reinsurers on unpaid losses and loss adjustment expenses was $336 million
and our receivable from reinsurers on paid losses and loss adjustment expenses was $7 million. As of December 31, 2017, no
reinsurer, on an individual basis, had an estimated net amount due which exceeded $29 million.
Our claims handling could result in a bad faith claim against us.
We have been sued from time to time for allegedly acting in bad faith during our handling of a claim. The damages
claimed in actions for bad faith may include amounts owed by the insured in excess of the policy limits as well as
consequential and punitive damages. Awards above policy limits are possible whenever a case is taken to trial. These actions
have the potential to have a material and adverse effect on our financial condition and results of operations.
Changes in healthcare policy could have a material effect on our operations.
The ACA was enacted in March 2010, and many but not all of its provisions have become effective. To date, we do not
believe that the primary provisions of ACA have directly affected our business. However, regulations to implement the law may
be revised and the effect of currently enacted provisions may evolve over time. Specifically, presidential and congressional
elections in the U.S. could result in significant changes in, and uncertainty with respect to, legislation, regulation and
government policy. While it is not possible to predict whether and when any such changes will occur, recent proposals
discussed by the current U.S. administration included the repeal or material amendment of the ACA. Thus, the ACA may yet
have unanticipated or indirect effects on our business or alter the risk and cost environments in which we and our insureds
operate. These risks include: further increases in the number of physicians choosing to practice as a part of a larger healthcare
organization that utilizes a self-insurance or alternative risk management solution for its HCPL needs; use of electronic medical
records may lead to additional medical malpractice litigation or increase the cost of litigation; patient dissatisfaction may
increase due to greater strain on the patient-physician relationship; overall healthcare costs may increase which would increase
loss costs for claims involving bodily injury; and additional health conditions may be identified as work-related which could
increase the number of workers' compensation claims. Conversely, it is anticipated that there will be growth in the number of
ancillary healthcare providers that will become customers for HCPL products. We are unable to predict with any certainty the
effect that ACA or future related legislation will have on our insureds or our business.
Changes due to financial reform legislation could have a material effect on our operations.
The Dodd-Frank Act, enacted in July 2010 established additional regulatory oversight of financial institutions. While
regulations are still in development for various portions of the Dodd-Frank Act, to date the Act has not materially affected our
business. As detailed regulations are developed to implement the provisions of the Dodd-Frank Act, there may be changes in
the regulatory environment that affect the way we conduct our operations or the cost of regulatory compliance, or both. We are
unable to predict with any certainty the effect that the Dodd-Frank Act will have on our business.
One of the federal government bodies created by the Dodd-Frank Act was the FIO which, in December 2013, released a
proposal on insurance modernization and improvement of the system of insurance regulation in the U.S. Although the FIO is
prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance
matters and has limited power to preempt certain types of state insurance laws. The proposal advocates significantly greater
federal involvement in insurance regulation and identifies necessary reforms by the states to preclude further consideration of
direct federal regulation. While the proposal does not necessarily imply that the federal government will displace state
regulation completely, it does recommend more of a hybrid approach to insurance regulation. We cannot predict whether the
proposals will be adopted or what impact, if any, enacted laws may have on our business, financial condition or results of
operations.
During 2017, the U.S. House of Representatives passed the Financial CHOICE Act, which would amend or repeal certain
regulations in the Dodd-Frank Act, specifically modifying provisions related to insurance regulation. This proposed legislation
is now being considered by the U.S. Senate. Revisions include the consolidation of two conflicting federal insurance positions
into a single position established to advocate for the U.S. insurance industry at domestic and international levels, while
preserving the traditional state-based system of insurance regulation. We are unable to predict with any certainty the effect that
the Financial CHOICE Act, if passed, will have on our business.
The passage of tort reform or other legislation, and the subsequent review of such laws by the courts could have a material
impact on our operations.
Tort reforms generally restrict the ability of a plaintiff to recover damages by, among other limitations, eliminating
certain claims that may be heard in a court, limiting the amount or types of damages, changing statutes of limitation or the
period of time to make a claim, and limiting venue or court selection. A number of states in which we do business previously
enacted tort reform legislation in an effort to reduce escalating loss trends.
20
Challenges to tort reform have been undertaken in most states where tort reforms have been enacted, and in some states
the reforms have been fully or partially overturned. Additional challenges to tort reform may be undertaken. We cannot predict
with any certainty how state appellate courts will rule on these laws. While the effects of tort reform have been generally
beneficial to our business in states where these laws have been enacted, there can be no assurance that such reforms will be
ultimately upheld by the courts. Furthermore, if tort reforms are effective, the business of providing professional liability
insurance may become more attractive, thereby causing an increase in competition. In addition, the enactment of tort reforms
could be accompanied by legislation or regulatory actions that may be detrimental to our business because of expected benefits
which may or may not be realized. These expectations could result in regulatory or legislative action limiting the ability of
professional liability insurers to maintain rates at adequate levels.
Coverage mandates or other expanded insurance requirements could also be imposed. States may also consider state-
sponsored insurance entities that could remove our potential insureds from the private insurance market.
We continue to monitor developments on a state-by-state basis and make business decisions accordingly.
Our performance is dependent on the business, economic, regulatory and legislative conditions of states where we have a
significant amount of business.
Our top five states, Pennsylvania, Alabama, Indiana, Texas and Michigan, represented 41% of our direct premiums
written for the year ended December 31, 2017. Moreover, on a combined basis, Pennsylvania, Alabama and Indiana accounted
for 32% of our direct premiums written for each of the years ended December 31, 2017, 2016 and 2015. Unfavorable business,
economic or regulatory conditions in any of these states could have a disproportionately greater effect on us than they would if
we were less geographically concentrated.
From time to time we may identify opportunities for growth through acquisitions. However, approval of acquisitions may not be
granted or conditions of approval may adversely alter the expected value and benefits of the acquisition. In addition, expected
benefits from acquisitions may not be achieved or may be delayed longer than expected.
Growth through the acquisition of other companies or books of business is opportunistic and sporadic. If we are able to
identify a target for acquisition, state insurance regulation concerning change or acquisition of control could delay or prevent us
from completing the acquisition. State insurance regulatory codes provide that the acquisition of “control” of a domestic insurer
or of any person that directly or indirectly controls a domestic insurer cannot be consummated without the prior approval of the
domiciliary insurance regulator. There is no assurance that we will receive such approval from the respective insurance
regulator or that such approvals will not be conditioned in a manner that materially and adversely affects the aggregate
economic value and business benefits expected to be obtained and cause us to not complete the acquisition.
The Company performs thorough due diligence before agreeing to a merger or acquisition; however, there is no guarantee
that the procedures we perform will adequately identify all potential weaknesses or liabilities of the target company or potential
risks to the consolidated entity.
There is also no guarantee that businesses acquired in the future will be successfully integrated. Ineffective integration of
our businesses and processes may result in substantial costs or delays and adversely affect our ability to compete. The process
of integrating an acquired company or business can be complex and costly, and may create unforeseen operating difficulties
and expenditures. Potential problems that may arise include but are not limited to: business disruption, loss of customers and
employees, the ineffective integration of underwriting, claims handling and actuarial practices, an increase in the inherent
uncertainty of reserve estimates for a period of time until stable trends reestablish themselves within the combined
organization, diversion of management time and resources to acquisition integration challenges, the cultural challenges
associated with integrating employees, increased operating costs, assumption of greater than expected liabilities, or inability to
achieve cost savings.
Furthermore, claims may be asserted by either the policyholders or shareholders of any acquired entity related to
payments or other issues associated with the acquisition and merger into the consolidated entity. Such claims may prove costly
or difficult to resolve or may have unanticipated consequences.
If our businesses do not perform well, we may be required to recognize an impairment of our goodwill or intangible assets,
which could have a material adverse effect on our results of operations and financial condition.
We review our definite–lived intangible assets for impairment when events or changes in circumstances indicate that the
carrying value may not be recoverable from estimated future cash flows. We test goodwill and intangible assets with indefinite
lives for impairment at least annually. If we determine that such goodwill or intangible assets are impaired, we would be
required to write down the goodwill or the intangible asset by the amount of the impairment, with a corresponding charge to net
income. Such write downs could have a material adverse effect on our results of operations or financial position.
21
If we are unable to maintain favorable financial strength ratings, it may be more difficult for us to write new business or renew
our existing business.
Independent rating agencies assess and rate the claims-paying ability and the financial strength of insurers based upon
criteria established by the agencies. Periodically the rating agencies evaluate us to confirm that we continue to meet the criteria
of previously assigned ratings. The financial strength ratings assigned by rating agencies to insurance companies represent
independent opinions of financial strength and ability to meet policyholder and debt obligations and are not directed toward the
protection of equity investors.
Our principal operating subsidiaries hold favorable claims paying ratings with A.M. Best, Fitch and Moody’s. Claims-
paying ratings are used by agents, brokers and customers as an important means of assessing the financial strength and quality
of insurers. If our financial position deteriorates or the rating agencies significantly change the rating criteria that are used to
determine ratings, we may not maintain our favorable financial strength ratings from the rating agencies. A downgrade or
involuntary withdrawal of any such rating could limit or prevent us from writing desirable business.
The following table presents the claims paying ratings of our core insurance subsidiaries as of February 16, 2018.
ProAssurance Indemnity Company, Inc.
ProAssurance Casualty Company
ProAssurance Specialty Insurance Company, Inc.
Podiatry Insurance Company of America
PACO Assurance Company, Inc.
Noetic Specialty Insurance Company
Medmarc Casualty Insurance Company
Lloyd's Syndicate 1729 and Syndicate 6131 (2)
Eastern Alliance Insurance Company
Allied Eastern Indemnity Company
Eastern Advantage Assurance Company
Eastern Re Ltd., SPC
A.M. Best
(www.ambest.com)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A- (Excellent)
A+ (Superior)
A+ (Superior)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
Rating Agency (1)
Fitch
(www.fitchratings.com)
A (Strong)
A (Strong)
A (Strong)
A (Strong)
A (Strong)
A (Strong)
A (Strong)
AA- (Strong)
A (Strong)
A (Strong)
A (Strong)
NR
Moody’s
(www.moodys.com)
A2
A2
NR
A2
NR
NR
NR
NR
A3
A3
NR
NR
(1) NR indicates that the subsidiary has not been rated by the listed rating agency.
(2) Rating provided is the rating applicable to all Lloyd's syndicates.
Three rating agencies evaluate and rate our ability to service current debt and potential debt. These financial strength
ratings reflect each agency’s independent evaluation of our ability to meet our obligation to holders of our debt, if any. While
these ratings may be of greater interest to investors than our claims-paying ratings, these are not ratings of our equity securities
nor a recommendation to buy, hold or sell our equity securities.
Our business could be adversely affected by the loss or consolidation of independent agents, agencies, or brokers or brokerage
firms.
We heavily depend on the services of independent agents and brokers in the marketing of our insurance products. We face
competition from other insurance companies for their services and allegiance. These agents and brokers may choose to direct
business to competing insurance companies.
Our success is dependent upon our ability to effectively design and execute our business strategy.
The Company depends upon the skill and work product of our officers and employees in executing our business strategy.
While management and the Board monitor the strategic direction of the Company, strategic changes could be made that are not
supportable by our capital base.
Our success is dependent upon our ability to adequately and appropriately serve our customers.
The operations of the Company are heavily dependent upon the delivery of superior customer service across a broad
customer base, by which negative feedback from agents, insureds or internal staff could result in a loss of revenue for the
Company.
22
Our business could be affected by the loss of one or more of our senior executives.
We are heavily dependent upon our senior management, and the loss of services of our senior executives could adversely
affect our business. Our success has been, and will continue to be, dependent on our ability to retain the services of existing key
employees and to attract and retain additional qualified personnel in the future. The loss of the services of key employees or
senior managers, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect
the quality and profitability of our business operations.
Our Board regularly reviews succession planning relating to our Chief Executive Officer as well as other senior officers.
Mr. Starnes, our Chief Executive Officer and President, executed an amendment to his employment agreement effective June 1,
2017, which extends his service 5 years from the date of the agreement.
Provisions in our charter documents, Delaware law and state insurance law may impede attempts to replace or remove
management or may impede a takeover, which could adversely affect the value of our common stock.
Our certificate of incorporation, bylaws and Delaware law contain provisions that may have the effect of inhibiting a non-
negotiated merger or other business combination. We currently have no preferred stock outstanding, and no present intention to
issue any shares of preferred stock. In addition, our Corporate Governance Principles provide that the Board, subject to its
fiduciary duties, will not issue any series of preferred stock for any defense or anti-takeover purpose, for the purpose of
implementing any stockholders rights plan, or with features intended to make any acquisition more difficult or costly without
obtaining stockholder approval. However, because the rights and preferences of any series of preferred stock may be set by the
Board in its sole discretion, the rights and preferences of any such preferred stock may be superior to those of our common
stock and thus may adversely affect the rights of the holders of common stock.
The voting structure of common stock and other provisions of our certificate of incorporation are intended to encourage a
person interested in acquiring us to negotiate with and to obtain the approval of the Board in connection with a transaction.
However, certain of these provisions may discourage our future acquisition, including an acquisition in which stockholders
might otherwise receive a premium for their shares. As a result, stockholders who might desire to participate in such a
transaction may not have the opportunity to do so.
In addition, state insurance laws provide that no person or entity may directly or indirectly acquire control of an insurance
company unless that person or entity has received approval from the insurance regulator. An acquisition of control of
ProAssurance would be presumed if any person or entity acquires 10% (5% in Alabama) or more of our outstanding common
stock, unless the applicable insurance regulator determines otherwise. These provisions apply even if the offer may be
considered beneficial by stockholders.
We are a holding company and are dependent on dividends and other payments from our operating subsidiaries, which may be
subject to dividend restrictions.
We are a holding company whose principal source of funds is cash dividends and other permitted payments from
operating subsidiaries. If our subsidiaries are unable to make payments to us, or are able to pay only limited amounts, we may
be unable to make payments on our indebtedness, meet other holding company financial obligations, or pay dividends to
shareholders. The payment of dividends by these operating subsidiaries is subject to restrictions set forth in the insurance laws
and regulations of their respective states of domicile, as discussed in Item I under the heading "Insurance Regulatory Matters."
Regulatory requirements or changes to regulatory requirements could have a material effect on our operations.
Our insurance businesses are subject to extensive regulation by state insurance authorities in each state in which they
operate. Regulation is intended for the benefit of policyholders rather than shareholders. In addition to the amount of dividends
and other payments that can be made to a holding company by insurance subsidiaries, these regulatory authorities have broad
administrative and supervisory power relating to:
•
•
•
•
•
licensing requirements;
trade practices;
capital and surplus requirements;
investment practices; and
rates charged to insurance customers.
These regulations may impede or impose burdensome conditions on rate changes or other actions that we may desire to
take in order to enhance our results of operations. In addition, we may incur significant costs in the course of complying with
regulatory requirements. Most states also regulate insurance holding companies like us in a variety of matters such as
acquisitions, solvency and risk assessment, changes of control and the terms of affiliated transactions.
23
Also, certain states sponsor insurance entities which affect the amount and type of liability coverages purchased in the
sponsoring state. Changes to the number of state sponsored entities of this type could result in a large number of insureds
changing the amount and type of coverage purchased from private insurance entities such as ProAssurance.
We own a subsidiary domiciled in the Cayman Islands and subject to the laws of the Cayman Islands and regulations
promulgated by the CIMA. Failure to comply with these laws, regulations and requirements could result in consequences
ranging from a regulatory examination to a regulatory takeover of our Cayman subsidiary, which could potentially impact
profitability of alternative market solutions offered through this subsidiary.
Syndicate 1729 and Syndicate 6131 are regulated in the U.K. by the Prudential Regulation Authority and the Financial
Conduct Authority. All Lloyd's Syndicates must also comply with the bylaws and regulations established by the Council of
Lloyd's. Failure to comply with bylaws and regulations could affect our ability to underwrite as a Lloyd's Syndicate in the
future and therefore affect our profitability. Changes in bylaws and regulations could also affect the profitability of the
operations.
The European Union's executive body, the European Commission, has implemented new capital adequacy and risk
management regulations called Solvency II that apply to businesses within the European Union. Solvency II became effective
January 1, 2016. Syndicate 1729 and Syndicate 6131 follow the Solvency II compliance guidelines set out by the Council of
Lloyd's.
As a member of the Lloyd's market and a capital provider to Lloyd's Syndicate 1729 and Syndicate 6131 we are subject to
certain risks which could affect us.
As a participant in Lloyd's of London, Lloyd's Syndicates are subject to certain risks and uncertainties, including the
following:
•
•
•
•
•
•
•
•
reliance on insurance and reinsurance brokers and distribution channels to distribute and market products;
obligation to pay levies to Lloyd's;
obligations to maintain funds to support underwriting activities and risk-based capital requirements that are assessed
periodically by Lloyd's and subject to variation;
ability to maintain liquidity to fund claims payments, when due;
ability to obtain reinsurance and retrocessional coverage to protect against adverse loss activity;
reliance on ongoing approvals from Lloyd's and various regulators to conduct business, including a requirement that
Annual Business Plans be approved by Lloyd's before the start of underwriting for each account year;
financial strength ratings are derived from the rating assigned to Lloyd's, although they have limited ability to directly
affect the overall Lloyd's rating; and
reliance on Lloyd's trading licenses in order to underwrite business outside the U.K.
The assessments that we are required to pay to state associations may increase or our participation in mandatory risk retention
pools could be expanded and our results of operations and financial condition could suffer as a result.
Each state in which we operate has separate insurance guaranty fund laws requiring admitted property and casualty
insurance companies doing business within their respective jurisdictions to be members of their guaranty associations. These
associations are organized to pay covered claims (as defined and limited by the various guaranty association statutes) under
insurance policies issued by insurance companies that have become insolvent. Most guaranty association laws enable the
associations to make assessments against member insurers to obtain funds to pay covered claims after a member insurer
becomes insolvent. These associations levy assessments (up to prescribed limits) on all member insurers in a particular state on
the basis of the proportionate share of the premiums written by member insurers in the covered lines of business in that state.
Maximum assessments generally vary between 1% and 2% of annual premiums written by a member in that state. Some states
permit member insurers to recover assessments paid through surcharges on policyholders or through full or partial premium tax
offsets, while other states permit recovery of assessments through the rate filing process. We had no significant guaranty fund
recoupments or assessments in 2017, 2016 or 2015. Our practice is to accrue for insurance insolvencies when notified of
assessments. We are not able to reasonably estimate assessments or develop a meaningful range of possible assessments prior to
notice because the guaranty funds do not provide sufficient information for development of such estimates or ranges.
Certain states in which we write workers’ compensation insurance have established administrative and/or second injury
funds that levy assessments against insurers that write business in their state. The assessments are generally based on an
insurer’s proportionate share of premiums or losses in a particular state, and the assessment rate can vary from year to year.
Risk pooling mechanisms have been established in certain states that offer insurance coverage to individuals or entities
who are otherwise unable to purchase coverage from private insurers. Authorized property and casualty insurers in these states
are generally required to share in the underwriting results of these pooled risks, which are typically adverse. Should our
24
mandatory participation in such pools be increased or if the assessments from such pools increased, our results of operations
and financial condition would be negatively affected, although that was not the case in 2017, 2016 or 2015.
Our investment results will fluctuate as interest rates change.
Our investment portfolio is primarily comprised of interest-earning assets, marked to fair value each period. Thus,
prevailing economic conditions, particularly changes in market interest rates, may significantly affect our results of operations.
Significant movements in interest rates potentially expose us to lower yields or lower asset values. Changes in market interest
rate levels generally affect our net income to the extent that reinvestment yields are different than the yields on maturing
securities. Changes in interest rates also can affect the value of our interest-earning assets, which are principally comprised of
fixed and adjustable-rate investment securities. Generally, the values of fixed-rate investment securities fluctuate inversely with
changes in interest rates. Interest rate fluctuations could affect our stockholders’ equity, income and/or cash flows.
Our investments are subject to credit, prepayment and other risks.
A significant portion of our total assets ($3.7 billion or 75%) at December 31, 2017 are financial instruments whose value
can be significantly affected by economic and market factors beyond our control including, among others, the unemployment
rate, the strength of the domestic housing market, the price of oil, changes in interest rates and spreads, consumer confidence,
investor confidence regarding the economic prospects of the entities in which we invest, corrective or remedial actions taken by
the entities in which we invest, including mergers, spin-offs and bankruptcy filings, the actions of the U.S. government, and
global perceptions regarding the stability of the U.S. economy. Adverse economic and market conditions could cause
investment losses or OTTIs of our securities, which could affect our financial condition, results of operations, or cash flows.
At December 31, 2017 approximately 9% of our investment portfolio was invested in mortgage and asset-backed
securities. We utilize ratings determined by NRSROs (Moody’s, Standard & Poor’s, and Fitch) as an element of our evaluation
of the creditworthiness of our securities. The ratings are subject to error by the agencies; therefore, we may be subject to
additional credit exposure should the rating be misstated.
Our asset-backed securities are also subject to prepayment risk. A prepayment is the unscheduled return of principal.
When rates decline, the propensity for refinancing may increase and the period of time we hold our asset-backed securities may
shorten due to prepayments. Prepayments may cause us to reinvest cash proceeds at lower yields than the retired security.
Conversely, as rates increase, and motivations for prepayments lessen, the period of time over which our asset-backed securities
are repaid may lengthen, causing us to not reinvest cash flows at the higher available yields.
At December 31, 2017 the fair value of our state/municipal portfolio was $632.2 million (amortized cost basis of $618.4
million). While our state/municipal portfolio had a high credit rating (AA on average), which indicates a strong ability to pay,
there is no assurance that there will not be a credit related event which would cause fair values to decline. An economic
downturn could lessen tax receipts and other revenues in many states and their municipalities. Prospectively, with U.S.
corporate tax rates decreasing, the overall attractiveness of owning municipal bonds may decline and impact the market
valuations.
Our tax credit partnership interests are subject to risks related to the potential forfeiture of the tax credits and all or a
portion of the previously claimed tax credits. Loss of all or a portion of the tax credits might occur if the property owner fails to
meet the specified requirements of planning and constructing or, in the case of the qualified affordable housing project tax
credits, fails to operate the property as required or below expected capacity. Prospectively, with U.S. corporate tax rates
decreasing, the utilization of our tax credits may take longer than anticipated. While this would not impact the amount of tax
credits we receive, a delay in recognition could be impactful from an economic perspective due to the time value of money.
Additionally, the value of losses embedded in our tax credits could decrease due to a lower deduction value, which would
reduce the carrying value of the partnership interests and could result in an OTTI. At December 31, 2017 the carrying value of
our tax credit partnership interests was approximately $90.7 million.
In a period of market illiquidity and instability, the fair values of our investments are more difficult to assess and our
assessments may prove to be greater or less than amounts received in actual transactions.
In accordance with applicable GAAP, we value 94% of our investments at fair value and the remaining 6% at cost, equity,
or cash surrender value. See Notes 1, 2 and 3 of the Notes to Consolidated Financial Statements for additional information.
We determine the fair value of our investments using quoted exchange or over-the-counter prices, when available. At
December 31, 2017, we valued approximately 24% of our investments in this manner. When exchange or over-the-counter
quotes are not available, we estimate fair values based on broker dealer quotes and various other valuation methodologies,
which may require us to choose among various input assumptions and which requires us to utilize judgment. At December 31,
2017 approximately 64% of our investments were valued in this manner. When markets exhibit significant volatility, there is
more risk that we may utilize a quoted market price, broker dealer quote, valuation technique or input assumption that results in
25
a fair value estimate that is either over or understated as compared to actual amounts that would be received upon disposition of
the security. At December 31, 2017 approximately 6% of our investments are investment funds which measure fund assets at
fair value on a recurring basis and provide us with a NAV for our interest. As a practical expedient, we consider the NAV
provided to approximate the fair value of the interest. NAV is provided by the asset managers and in some cases estimates are
used for valuation and are subject to variations depending on those estimates.
Our Board may decide that our financial condition does not allow the continued payment of a quarterly cash dividend, or
requires that we reduce the amount of our quarterly cash dividend.
Our Board approved a cash dividend policy in September 2011, and most recently paid a $5.00 per share dividend for the
three months ended December 31, 2017, which included a $4.69 special dividend. However, any decision to pay future cash
dividends is subject to the Board’s final determination after a comprehensive review of the Company’s financial performance,
future expectations and other factors deemed relevant by the Board.
Our ability to issue additional debt or letters of credit or other types of indebtedness on terms consistent with current debt is
subject to market conditions, economic conditions at the time of proposed issuance, results of ratings reviews and the inclusion
in certain bond indices of past and future issues. Also, certain of our current debt agreements and loans require a specific debt
to capital ratio, and the issuance of debt by one of our insurance subsidiaries requires regulatory approval, both of which may
limit or prohibit the issuance of additional debt.
During 2013, we issued $250 million of unsecured Senior Notes Payable due in 2023 at a 5.3% interest rate. There is no
guarantee that additional debt could be issued on similar terms in the future as rates available to us may change due to changes
in the economic climate or shifts in the yield curve may occur or an increase in our level of debt may result in rating agencies
lowering our debt rating. Additionally, our Revolving Credit Agreement requires that our consolidated debt to capital ratio
(0.21 to 1.0 at December 31, 2017) be 0.35 to 1.0 or less.
During 2017, two of our insurance subsidiaries entered into ten-year mortgage loans. These mortgage loans require each
of the subsidiaries to have a leverage ratio of consolidated funded debt to consolidated total capitalization (principally, SAP
consolidated net worth plus consolidated funded debt) be 0.35 to 1.0 or less. Furthermore, our insurance subsidiaries must
obtain regulatory approval before incurring additional debt.
Resolution of uncertain tax matters and changes in tax laws or taxing authority interpretations of tax laws could result in
actual tax benefits or deductions that are different than we have estimated, both with regard to amounts recognized and the
timing of recognition. Such differences could affect our results of operations or cash flows.
Our provision for income taxes, our recorded tax liabilities and net deferred tax assets, including any valuation
allowances, are recorded based on estimates. These estimates require us to make significant judgments regarding a number of
factors, including, among others, the applicability of various federal and state laws, the interpretations given to those tax laws
by taxing authorities, courts and the Company, the timing of future income and deductions, and our expected levels and sources
of future taxable income. We believe our tax positions are supportable under current tax laws and that our estimates are
prepared in accordance with GAAP. Additionally, from time to time, due to changes in economic and/or political conditions,
there are changes in tax laws and interpretations of tax laws which could significantly change our estimates of the amount of
tax benefits or deductions expected to be available to us in future periods. Specifically, recent changes in federal tax law
includes a reduction in the U.S. corporate income tax rate, changes to the cost of cross border reinsurance, changes to the
overall tax base and a limitation on the deductibility of certain executive compensation in future periods. Changes to our prior
estimates in these cases would be reflected in the period changed and could have a material effect on our effective tax rate,
financial position, results of operations and cash flows. As the reinsurance portion of our workers’ compensation business is
domiciled in the Cayman Islands, changes in Cayman Island tax laws as well as the recent change in U.S. federal tax law
regarding outbound cross border affiliate reinsurance could result in the loss of profitability of that business.
We are subject to U.S. federal and various state income taxes as well as U.K. related taxes. We are periodically under
examination by federal, state and local authorities regarding income tax matters and our tax positions could be successfully
challenged; the costs of defending our tax positions could be considerable. Our estimate of our potential liability for known
uncertain tax positions is reflected in our financial statements. As of December 31, 2017 we had a federal income tax payable
of approximately $8.0 million. We also had a liability for unrecognized current tax benefits of $5.3 million, and we had a net
deferred tax asset of approximately $9.9 million.
26
New or changes in existing accounting standards, practices and/or policies, as well as subjective assumptions, estimates and
judgments by management related to complex accounting matters could significantly affect our financial results or our ability
to maintain investor confidence and shareholder value.
GAAP and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide
range of matters that are relevant to our business, such as revenue recognition, lease accounting, estimation of losses,
determination of fair value, asset impairment (particularly investment securities and goodwill) and tax matters, are highly
complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or
changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial
performance or financial condition. See Note 1 of the Notes to Consolidated Financial Statements for a description of our
significant accounting policies.
ProAssurance is primarily a holding company of insurance subsidiaries which are required to comply with SAP. SAP and
its components are subject to review by the NAIC and state insurance departments. The NAIC Accounting Practices and
Procedures Manual provides that a state insurance department may allow insurance companies that are domiciled in that state
to depart from SAP by granting them permitted non-SAP accounting practices. This permission may permit a competitor or
competitors to use a more favorable accounting policy.
It is uncertain whether or how SAP might be revised or whether any revisions will have a positive or negative effect. It is
also uncertain whether any changes to SAP or its components or any permitted non-SAP accounting practices granted to our
competitors will negatively affect our financial results or operations. See the full discussion on regulatory matters in Item I
under the heading "Insurance Regulatory Matters."
Our interpretation, integration and/or compliance with new or changes to existing pronouncements by GAAP or SAP
could materially impact us as a publicly traded company as it relates to investor confidence and shareholder value.
We are subject to numerous NYSE and SEC regulations including insider trading regulations, Regulation FD, and regulations
requiring timely and accurate reporting of our operating results as well as certain events and transactions. Noncompliance
with these regulations could subject us to enforcement actions by the NYSE or the SEC, and could affect the value of our shares
and our ability to raise additional capital.
The Company carefully adheres to NYSE and SEC requirements as the loss of trading privileges on the NYSE or an SEC
enforcement action could have a significant financial impact on the Company. Failure to comply with various SEC reporting
and record keeping requirements could result in a decline in the value of our stock or a decline in investor confidence which
could directly impact our ability to efficiently raise capital. Failure to adhere to NYSE requirements could result in fines,
trading restriction or delisting.
The operations of the Company are heavily reliant upon the Company's reputation as an ethical business organization
providing needed services to its customers.
The Company's positive reputation is critical to its role as an insurance provider and as a publicly traded company. The
Board adopted a Code of Ethics and Conduct and management is heavily focused on the integrity of our employees and third-
party suppliers, agents or brokers. Illegal, unethical or fraudulent activities perpetrated by an employee or one of our third-party
agencies or brokers for personal gain could expose the Company to a potential financial loss.
A natural disaster or pandemic event, or closely related series of events, could cause loss of lives or a substantial loss of
property or operational ability at one or more of the Company's facilities.
The Company's disaster preparedness encompasses our Business Continuity Plan, Disaster Recovery Plan, Operations
Plan and Pandemic Response Plan. Our disaster preparedness is focused on maintaining the continuity of the Company's data
processing and telephone capabilities as well as the use of alternate and temporary facilities in the event of a natural disaster or
medical event. The Company's plans are reviewed during the insurance department examinations of the statutory insurance
companies. While the Company has plans in place to respond to both short- and long-term disaster scenarios, the loss of certain
key operating facilities or data processing capabilities could have a significant impact on Company operations.
The operations of the Company are dependent upon the availability, integrity and security of our internal technology
infrastructure and that of certain third parties. Any significant disruption of these infrastructures could result in unauthorized
access to Company data or reduce our ability to conduct business effectively, or both.
The Company is dependent upon its technology infrastructure and that of certain third parties to operate and report
financial and other Company information accurately and timely. The Company has focused resources on securing and
preserving the integrity of our data processing systems and related data. Additionally, the Company evaluates the integrity and
security of the technology infrastructure of third parties that process or store data that the Company considers to be significant.
27
However, there is no guarantee that measures taken to date will completely prevent possible disruption, damage or destruction
by intentional or unintentional acts or events such as cyber-attacks, viruses, sabotage, human error, system failure or the
occurrence of numerous other human or natural events. Disruption, damage or destruction of any of our systems or data could
cause our normal operations to be disrupted or unauthorized internal or external knowledge or misuse of confidential Company
data could occur, all of which could be harmful to the Company from both a financial and reputational perspective.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
PROPERTIES.
We own three office properties, one of which is unencumbered. Our properties in Birmingham, AL and Franklin, TN are
encumbered by ten-year mortgage loans entered into during 2017 for the purpose of recapitalization of these properties:
Property Location
Birmingham, AL*
Franklin, TN
Okemos, MI
* Corporate Headquarters
Square Footage of Properties
Occupied by
ProAssurance
Leased or Available
for Lease
120,000
52,000
53,000
45,000
51,000
—
Total
165,000
103,000
53,000
ITEM 3.
LEGAL PROCEEDINGS.
Our insurance subsidiaries are involved in various legal actions, a substantial number of which arise from claims made
under insurance policies. While the outcome of all legal actions is not presently determinable, management and its legal
counsel are of the opinion that these actions will not have a material adverse effect on our financial position or results of
operations. See Note 8 of the Notes to Consolidated Financial Statements included herein.
28
EXECUTIVE OFFICERS OF PROASSURANCE CORPORATION
The executive officers of ProAssurance Corporation serve at the pleasure of the Board. We have a knowledgeable and
experienced management team with established track records in building and managing successful insurance operations.
Following is a brief description of each executive officer of ProAssurance, including their principal occupation, and relevant
background with ProAssurance and former employers.
W. Stancil Starnes
Howard H. Friedman
Jeffrey P. Lisenby
Edward L. Rand, Jr.
Frank B. O’Neil
Michael L. Boguski
Ross E. Taubman
Mr. Starnes was appointed as Chief Executive Officer in 2007 and has served as the Chairman
of the Board since 2008. In 2012 he was appointed President of ProAssurance. Mr. Starnes
previously served as President, Corporate Planning and Administration of Brasfield & Gorrie,
Inc., a large national commercial contractor. Prior to 2006, Mr. Starnes served as the Senior and
Managing Partner of the law firm of Starnes & Atchison, LLP, where he was extensively
involved with ProAssurance and its predecessors in the defense of healthcare professional
liability claims for over 25 years. Mr. Starnes served as a director of Infinity Property and
Casualty Corporation, a public insurance holding company, from 2008 to May 2017 where he
served on the Audit and Investment Committees. Mr. Starnes currently serves on the Board of
Trustees for the University of Alabama. He also serves on the Board of Directors of National
Commerce Corporation, located in Birmingham, Alabama, where he serves as Chairman of the
Nominating and Corporate Governance Committee, Chairman of the Pricing Committee and is
a member of the Compensation Committee. (Age 69)
Mr. Friedman was appointed as President of our Healthcare Professional Liability Group in
2014, and is also our Chief Underwriting Officer and Chief Actuary. Mr. Friedman has
previously served as a Co-President of our Professional Liability Group, Chief Financial
Officer, Corporate Secretary, and as the Senior Vice President of Corporate Development. Mr.
Friedman joined our predecessor in 1996. Mr. Friedman is an Associate of the Casualty
Actuarial Society and a member of the American Academy of Actuaries. (Age 59)
Mr. Lisenby was appointed as an Executive Vice President in 2014 and is also our General
Counsel, Corporate Secretary and head of the corporate Legal Department. Mr. Lisenby has
previously served as Senior Vice President. Prior to joining ProAssurance, Mr. Lisenby
practiced law privately in Birmingham, Alabama. Mr. Lisenby is a member of the Alabama
State Bar and the United States Supreme Court Bar and is a Chartered Property Casualty
Underwriter. (Age 49)
Mr. Rand was appointed as an Executive Vice President in 2014, President of our Medmarc
subsidiary in 2016 and Chief Operating Officer in 2018. Mr. Rand is also our Chief Financial
Officer and Chief Accounting Officer. Mr. Rand previously served as our Senior Vice President
of Finance upon joining ProAssurance in 2004. Prior to joining ProAssurance, Mr. Rand was
the Chief Accounting Officer and Head of Corporate Finance for PartnerRe Ltd. Prior to that
time Mr. Rand served as the Chief Financial Officer of Atlantic American Corporation.
(Age 51)
Mr. O’Neil was appointed as our Senior Vice President and Chief Communications Officer in
2001. Mr. O’Neil has previously served as our Senior Vice President of Corporate
Communications, having joined our predecessor in 1987. (Age 64)
Mr. Boguski is President of our Eastern subsidiary. Prior to the acquisition of Eastern, Mr.
Boguski served as President and Chief Executive Officer of Eastern, and first joined Eastern in
1997. (Age 55)
Dr. Taubman is President and Chief Medical Officer of our PICA subsidiary. Prior to joining
PICA, Dr. Taubman practiced podiatry for 26 years. During that time, Dr. Taubman served as
Treasurer, Vice-President and President of the Maryland Podiatric Medical Association. Dr.
Taubman is a diplomate in the American Board of Podiatric Surgery. (Age 60)
We have adopted a Code of Ethics and Conduct that applies to our directors and executive officers, including but not
limited to our principal executive officers and principal financial officer. We also have share ownership guidelines in place to
ensure that management maintains a significant portion of their personal investments in the stock of ProAssurance. Both our
Code of Ethics and Conduct and our Share Ownership Guidelines are available on the Governance section of our website.
Printed copies of these documents may be obtained from Frank O’Neil, Senior Vice President, ProAssurance Corporation,
either by mail at P.O. Box 590009, Birmingham, Alabama 35259-0009, or by telephone at (205) 877-4400 or (800) 282-6242.
29
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
At February 16, 2018, ProAssurance Corporation had 2,595 stockholders of record and 53,457,021 shares of common
stock outstanding. ProAssurance’s common stock currently trades on the NYSE under the symbol “PRA.”
Quarter
First
Second
Third
Fourth
Quarter
First
Second
Third
Fourth*
2017
2016
High
61.85
62.45
61.80
63.00
Low
53.90
57.80
51.30
55.00
$
$
$
$
Dividends Declared
2017
0.31
0.31
0.31
5.00
2016
0.31
0.31
0.31
5.00
$
$
$
$
$
$
$
$
$
$
$
$
High
51.05
53.55
55.02
62.85
Low
46.22
47.73
51.29
50.75
$
$
$
$
Dividends Paid
2017
5.00
0.31
0.31
0.31
2016
1.31
0.31
0.31
0.31
$
$
$
$
$
$
$
$
$
$
$
$
* Includes a special dividend of $4.69 per common share declared in both 2017 and 2016.
The Board declared a quarterly dividend in each quarter of 2017 and 2016. The dividends were paid in the month after
the quarter ended. The Board also declared special dividends of $4.69 per common share during the fourth quarters of both
2017 and 2016, each of which were paid in January of the following year. Any decision to pay regular or special cash dividends
in the future is subject to the Board’s final determination after a comprehensive review of financial performance, future
expectations and other factors deemed relevant by the Board.
ProAssurance’s insurance subsidiaries are subject to restrictions on the payment of dividends to the parent. Information
regarding restrictions on the ability of the insurance subsidiaries to pay dividends is incorporated herein by reference from the
paragraphs under the heading “Insurance Regulatory Matters–Regulation of Dividends and Other Payments from Our
Operating Subsidiaries” in Item 1 of this Form 10-K.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information regarding ProAssurance’s equity compensation plans as of December 31, 2017.
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved
by security holders
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
(a)
673,227
—
(b)
$—
—
Number of securities
remaining available
for future issuance
under equity compensation
plans (excluding securities reflected
in column (a))
(c)
*
2,082,901
—
* No outstanding options as of December 31, 2017. Other outstanding share units have no exercise price.
30
Issuer Purchases of Equity Securities
Period
October 1 - 31, 2017
November 1 - 30, 2017
December 1 - 31, 2017
Total
Total Number of
Shares Purchased
Average
Price Paid
per Share
Total Number of Shares
Purchased as Part of
Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that May
Yet Be Purchased Under
the Plans or Programs*
(In thousands)
—
—
—
—
N/A
N/A
N/A
$—
—
—
—
—
$109,643
$109,643
$109,643
* Under its current plan begun in November 2010, the Board has authorized $600 million for the repurchase of common shares or the
retirement of outstanding debt. This is ProAssurance's only plan for the repurchase of common shares, and the plan has no expiration date.
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands except per share data)
2017
2016
2015
2014
2013
Year Ended December 31
Selected Financial Data (1)
Gross premiums written
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized investment gains (losses)
Other income
Total revenues
Net losses and loss adjustment expenses
Net income (2)
Net income per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Balance Sheet Data, as of December 31
Total investments
Total assets (3)
Reserve for losses and loss adjustment
expenses
Debt less debt issuance costs (3)
Total liabilities (3)
Total capital
Total capital per share of common stock
outstanding
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
874,876
738,531
95,662
8,033
16,409
7,514
866,149
469,158
107,264
2.01
2.00
53,393
53,611
835,014
733,281
100,012
$
$
$
812,218
694,149
108,660
$
$
$
(5,762) $
$
34,875
$
$
$
$
$
$
7,808
870,214
443,229
151,081
2.84
2.83
53,216
53,448
$
3,682
(41,639) $
$
7,227
$
$
$
$
$
772,079
410,711
116,197
2.12
2.11
54,795
55,017
$
$
$
$
$
$
$
$
$
$
$
779,609
699,731
125,557
3,986
14,654
8,398
852,326
363,084
196,565
3.32
3.30
59,285
59,525
567,547
527,919
129,265
7,539
67,904
7,551
740,178
224,761
297,523
4.82
4.80
61,761
62,020
$ 3,686,528
$ 3,925,696
$ 3,650,130
$ 4,009,707
$ 3,941,045
$ 4,929,197
$ 5,065,181
$ 4,906,021
$ 5,167,375
$ 5,147,794
$ 2,048,381
$ 1,993,428
$ 2,005,326
$ 2,058,266
$ 2,072,822
$
411,811
$
448,202
$
347,858
$
248,215
$
247,695
$ 3,334,402
$ 3,266,479
$ 2,947,667
$ 3,009,431
$ 2,753,380
$ 1,594,795
$ 1,798,702
$ 1,958,354
$ 2,157,944
$ 2,394,414
Common stock outstanding, period end
53,457
53,251
53,101
56,534
$
29.83
$
33.78
$
36.88
$
38.17
$
39.13
61,197
(1) Includes acquired entities since date of acquisition only.
(2) Includes a gain on acquisition of $32.3 million for the year ended December 31, 2013.
(3) For all periods presented, debt is shown net of unamortized debt issuance costs which were previously reported as a part of other assets.
31
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to those
statements which accompany this report. Throughout the discussion we use certain terms and abbreviations, which can be
found in the Glossary of Terms and Acronyms at the beginning of this report. In addition, a glossary of insurance terms and
phrases is available on the investor section of our website. Throughout the discussion, references to "ProAssurance," "PRA,"
"Company," "we," "us" and "our" refer to ProAssurance Corporation and its consolidated subsidiaries. The discussion contains
certain forward-looking information that involves significant risks, assumptions and uncertainties. As discussed under the
heading "Caution Regarding Forward-Looking Statements," our actual financial condition and operating results could differ
significantly from these forward-looking statements.
ProAssurance Overview
We are an insurance holding company and our operating results are primarily derived from the operations of our
insurance subsidiaries, which provide professional liability insurance for healthcare professionals and facilities, professional
liability insurance for attorneys, liability insurance for medical technology and life sciences risks and workers' compensation
insurance. We are also the majority capital provider for Syndicate 1729 which writes a range of property and casualty insurance
and reinsurance in both the U.S. and international markets. Beginning in 2018, we are the sole (100%) capital provider for a
newly formed SPA, Syndicate 6131, which focuses on contingency and specialty property business.
We report our results in four segments based on the operational focus of the segment. Our Specialty P&C segment
includes our professional liability business and our medical technology liability business. Our Workers' Compensation segment
includes workers' compensation insurance for employers, groups and associations. Our Lloyd's Syndicate segment reflects
operating results from our 58% participation in Syndicate 1729. Beginning in 2018, our Lloyd's Syndicate segment will reflect
our continuing participation in the operating results of Syndicate 1729, in which our participation has increased from 58% to
62% on January 1, 2018, and our 100% participation in the operating results of Syndicate 6131. Information regarding Lloyd's
operations derived from U.K. based entities is normally reported on a quarter delay, except when information is available that is
material to the current period. Investment results associated with our FAL investments and certain U.S. paid administrative
expenses are reported concurrently as that information is available on an earlier time frame. Our Corporate segment includes
our investment operations, which are managed at the corporate level, except results associated with investment assets solely
allocated to Lloyd's Syndicate operations, non-premium revenues generated outside of our insurance entities, corporate
expenses, interest expense and U.S. income taxes. Additional information regarding our segments is included in Note 15 of the
Notes to Consolidated Financial Statements and in Part I.
Growth Opportunities and Outlook
Over the long-term we expect our growth to come primarily through controlled expansion of our existing operations. In
addition, from time to time, we may identify opportunities for growth through the acquisition of other insurers, service
providers or books of business. Growth through acquisition is often opportunistic and cannot be predicted.
We operate in very competitive markets and face strong competition from other insurance companies for all of our
insurance products. HCPL insurance represents the majority of our gross premiums written (53% in 2017, excluding tail) and
the healthcare market has been trending toward the formation of larger medical practice groups and the employment of
physicians by hospitals. Large medical groups and facilities frequently manage their healthcare professional liability exposure
outside of the traditional first dollar insurance marketplace using self-insured mechanisms and other risk sharing arrangements.
In response to these trends, we offer products designed to provide greater risk sharing options to hospitals and large physician
groups.
In 2014, we strengthened our position in the healthcare liability space by acquiring Eastern, a provider of workers'
compensation insurance. We have also been a consistent acquirer of other physician insurers, completing four acquisitions
between 2009 and 2013 as well as acquiring an agency largely focused on the professional liability needs of allied healthcare
providers, an insurer focused on the legal professional liability market and a mutual company that focused on medical
technology liability insurance for companies that manufacture or distribute medical products.
Late in 2013, we completed the process of becoming a corporate member of Lloyd's of London, an internationally
recognized specialist insurance market, by providing the majority of the capital to Syndicate 1729. Syndicate 1729 covers a
range of property and casualty insurance and reinsurance lines and began active operations effective January 1, 2014. For the
2018 underwriting year, we increased our participation in the operating results of Syndicate 1729 from 58% to 62%. Syndicate
1729 has a maximum underwriting capacity of £132 million (approximately $178.4 million at December 31, 2017) for the 2018
underwriting year, of which £82 million (approximately $110.8 million at December 31, 2017) is our allocated underwriting
capacity as a corporate member.
32
Late in 2017, we provided 100% of the capital for the newly formed SPA, Syndicate 6131. Syndicate 6131, which began
active operations effective January 1, 2018, will serve as a quota share reinsurer to Syndicate 1729 and will focus on
contingency and specialty property business. For the 2018 underwriting year, Syndicate 6131 has a maximum underwriting
capacity of £8 million (approximately $10.8 million at December 31, 2017). We have a total capital commitment to support our
Lloyd's Syndicate operations through 2022 of up to $200 million. See further discussion in our Segment Operating Results -
Lloyd's Syndicate section that follows.
We believe our emphasis on the fair treatment of our insureds and other important stakeholders through our commitment
to “Treated Fairly” has enhanced our market position and differentiated us from other insurers. We will continue to practice our
values of integrity, leadership, relationships and enthusiasm in all of our activities. We will honor these values in the execution
of "Treated Fairly" to perform our Mission and realize our Vision. We believe that as we reach more customers with this
message we will continue to improve retention and add new insureds.
Key Performance Measures
We have sustained our financial stability during difficult market conditions through responsible underwriting, pricing and
loss reserving practices and through conservative investment practices. We are committed to maintaining prudent operating and
financial leverage and to conservatively investing our assets. We recognize the importance that our customers and producers
place on the financial strength of our insurance subsidiaries and we manage our business to protect our financial security.
We consider a number of performance measures, including the following:
• The net loss ratio is calculated as net losses incurred divided by net premiums earned and is a component of
underwriting profitability.
• The underwriting expense ratio is calculated as underwriting, policy acquisition and operating expenses incurred
divided by net premiums earned and is a component of underwriting profitability.
• The combined ratio is the sum of the net loss ratio and the underwriting expense ratio and measures underwriting
profitability.
• The investment income ratio is calculated as net investment income divided by net premiums earned and measures the
contribution investment earnings provide to our overall profitability.
• The operating ratio is the combined ratio, less the investment income ratio. This ratio provides the combined effect of
underwriting profitability and investment income.
• The tax ratio is calculated as total income tax expense divided by income (loss) before income taxes and measures our
effective tax rate.
• ROE is calculated as net income for the period divided by the average of beginning and ending shareholders’ equity.
This ratio measures our overall after-tax profitability and shows how efficiently capital is being used.
• Book value per share is calculated as total shareholders’ equity at the balance sheet date divided by the total number of
common shares outstanding. This ratio measures the net worth of the company to shareholders on a per-share basis.
The declaration of dividends decreases book value per share. Growth in book value per share, adjusted for dividends
declared, is an indicator of overall profitability.
We particularly focus on our combined ratio and investment returns, both of which directly affect our ROE and growth in
our book value. We currently target a dynamic ROE of 700 basis points above the 10-year U.S. Treasury rate, which at
December 31, 2017 was approximately 9.4%.
Our emphasis on rate adequacy, selective underwriting, effective claims management and prudent investments is a key
factor in our ability to achieve our ROE target. We closely monitor premium revenues, losses and loss adjustment costs, and
underwriting and policy acquisition expenses. Our overall investment strategy is to focus on maximizing current income from
our investment portfolio while maintaining safety, liquidity, duration and portfolio diversification. While we engage in
activities that generate other income, such activities, principally insurance agency services, do not constitute a significant use of
our resources or a significant source of revenues or profits.
33
Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in conformity with GAAP. Preparation of these financial statements
requires us to make estimates and assumptions that affect the amounts we report on those statements. We evaluate these
estimates and assumptions on an ongoing basis based on current and historical developments, market conditions, industry
trends and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual
results will conform to our estimates and assumptions; reported results of operations may be materially affected by changes in
these estimates and assumptions.
Management considers the following accounting estimates to be critical because they involve significant judgment by
management and those judgments could result in a material effect on our financial statements.
Reserve for Losses and Loss Adjustment Expenses
The largest component of our liabilities is our reserve for losses and loss adjustment expenses ("reserve for losses" or
"reserve"), and the largest component of expense for our operations is incurred losses and loss adjustment expenses (also
referred to as “losses and loss adjustment expenses,” “incurred losses,” “losses incurred” and “losses”). Incurred losses reported
in any period reflect our estimate of losses incurred related to the premiums earned in that period as well as any changes to our
previous estimate of the reserve required for prior periods.
As of December 31, 2017 our reserve is comprised almost entirely of long-tail exposures. The estimation of long-tailed
losses is inherently difficult and is subject to significant judgment on the part of management. Due to the nature of our claims,
our loss costs, even for claims with similar characteristics, can vary significantly depending upon many factors, including but
not limited to the specific characteristics of the claim and the manner in which the claim is resolved. Long-tailed insurance is
characterized by the extended period of time typically required to assess the viability of a claim, potential damages, if any, and
to then reach a resolution of the claim. The claims resolution process may extend to more than five years. The combination of
continually changing conditions and the extended time required for claim resolution results in a loss cost estimation process
that requires actuarial skill and the application of significant judgment and such estimates require periodic modification.
Our reserve is established by management after taking into consideration a variety of factors including premium rates,
claims frequency and severity, historical paid and incurred loss development trends, the expected effect of inflation, general
economic trends, the legal and political environment and the conclusions reached by our internal and consulting actuaries. We
update and review the data underlying the estimation of our reserve for losses each reporting period and make adjustments to
loss estimation assumptions that we believe best reflect emerging data. Both our internal and consulting actuaries perform an
in-depth review of our reserve for losses on at least a semi-annual basis using the loss and exposure data of our insurance
subsidiaries.
We partition our reserves by accident year, which is the year in which the claim becomes our liability. As claims are
incurred (reported) and claim payments are made, they are aggregated by accident year for analysis purposes. We also partition
our reserves by reserve type: case reserves and IBNR reserves. Case reserves are established by our claims departments based
upon the particular circumstances of each reported claim and represent our estimate of the future loss costs (often referred to as
expected losses) that will be paid on reported claims. Case reserves are decremented as claim payments are made and are
periodically adjusted upward or downward as estimates regarding the amount of future losses are revised; reported loss for an
individual claim is the case reserve at any point in time plus the claim payments that have been made to date. IBNR reserves
represent our estimate in the aggregate of future development on losses that have been reported to us and our estimate of losses
that have been incurred but not reported to us.
Our reserving process can be broadly grouped into three areas: the establishment of the reserve for the current accident
year (the initial reserve), the re-estimation of the reserve for prior accident years (development of prior accident years) and the
establishment of the initial reserve for risks assumed in business combinations (the acquired reserve). A summary of the activity
in our net reserve for losses during 2017, 2016 and 2015 is provided under the heading "Losses" in the Liquidity and Capital
Resources and Financial Condition section that follows.
Current Accident Year - Initial Reserve
Considerable judgment is required in establishing our initial reserve for any current accident year period, as there is
limited data available upon which to base our estimate. Our process for setting an initial reserve considers the unique
characteristics of each product, but in general we rely heavily on the loss assumptions that were used to price business, as our
pricing reflects our analysis of loss costs that we expect to incur relative to the insurance product being priced.
Specialty P&C Segment. Loss costs within this segment are impacted by many factors including but not limited to the
nature of the claim, including whether or not the claim is an individual or a mass tort claim, the personal situation of the
claimant or the claimant's family, the outcome of jury trials, the legislative and judicial climate where any potential litigation
34
may occur, general economic conditions and, for claims involving bodily injury, the trend of healthcare costs. Within our
Specialty P&C segment, for our HCPL business (74% of our consolidated gross reserve for losses and loss adjustment expenses
for the year ended December 31, 2017), we set an initial reserve using the average loss ratio used in our pricing, plus an
additional provision in consideration of the historical loss volatility we and others in the industry have experienced. For our
HCPL business our target loss ratio during recent accident years has ranged from 77% to 80% and the provision for loss
volatility has ranged from 8 to 10 percentage points, producing an overall average initial loss ratio for our HCPL business of
approximately 90%. The reasons for the variability in loss provisions from period to period have included additional loss
activity within our surplus lines business, provisions for losses in excess of policy limits, adjustments to unallocated loss
adjustment expenses, adjustment to the reserve for the death, disability and retirement provisions in our policies and additional
losses recorded for particular exposures, such as mass torts. These specific adjustments are made if we believe the results for a
given accident year are likely to exceed those anticipated by our pricing. We believe use of a provision for volatility
appropriately considers the inherent risks and limitations of our rate development process and the historic volatility of
professional liability losses (the industry has experienced accident year loss ratios as high as 138% and as low as 54% over the
past 30 years) and produces a reasonable best estimate of the reserve required to cover actual ultimate unpaid losses. A similar
practice is followed for our legal professional liability business (3% of our consolidated gross reserve for losses and loss
adjustment expenses for the year ended December 31, 2017).
The risks insured in our medical technology liability business (5% of our consolidated gross reserve for losses and loss
adjustment expenses for the year ended December 31, 2017) are more varied, and policies are individually priced based on the
risk characteristics of the policy and the account. These policies often have significant deductibles or self-insured retentions and
the insured risks range from startup operations to large, multinational entities. Reserves are established using our most recently
developed actuarial estimates of losses expected to be incurred based on factors which include results from prior analysis of
similar business, industry indications, observed trends and judgment. Claims in this line of business primarily involve bodily
injury to individuals and are affected by factors similar to those of our HCPL line of business. For the medical technology
liability business, we also establish an initial reserve using a loss ratio approach, including a provision in consideration of
historical loss volatility that this line of business has exhibited.
Workers' Compensation Segment. Many factors affect the ultimate losses incurred for our workers' compensation
coverages (14% of our consolidated gross reserve for losses and loss adjustment expenses for the year ended December 31,
2017) including but not limited to the type and severity of the injury, the age and occupation of the injured worker, the
estimated length of disability, medical treatment and related costs, and the jurisdiction and workers' compensation laws of the
injury occurrence. We use various actuarial methodologies in developing our workers’ compensation reserve, combined with a
review of the exposure base generally based upon payroll of the insured. For the current accident year, given the lack of
seasoned information, the different actuarial methodologies produce results with significant variability; therefore, more
emphasis is placed on supplementing results from the actuarial methodologies with trends in exposure base, medical expense
inflation, general inflation, severity, and claim counts, among other things, to select an expected loss ratio.
Lloyd's Syndicate Segment. Due to the relatively short history of Syndicate 1729 (January 1, 2014) we are influenced by
historical claims experience of the Lloyd's market for similar risks in estimating the appropriate initial reserves for our Lloyd's
Syndicate segment. We expect loss ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the
book begins to mature. Loss ratios can also fluctuate due to the timing of earned premium adjustments. Such adjustments may
be the result of premiums for certain policies and assumed reinsurance contracts being reported subsequent to the coverage
period and may be subject to adjustment based on loss experience. Premium and exposure for some of Syndicate 1729's
insurance policies and reinsurance contracts are initially estimated and subsequently recorded over an extended period of time
as reports are received under binding authority programs. When reports are received, the premium, exposure and corresponding
loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the
accident year in which the premium is earned.
For significant property catastrophe exposures, Syndicate 1729 uses third-party catastrophe models to accumulate a
listing of potentially affected policies. Each identified policy is given an estimate of loss severity based upon a combination of
factors including the probable maximum loss of each policy, market share analytics, underwriting judgment, client/broker
estimates and historical loss trends for similar events. These models are inherently uncertain, reliant upon key assumptions and
management judgment and are not always a representation of actual events and ensuing potential loss exposure. Determination
of actual losses may take an extended period of time until claims are reported and resolved, including coverage litigation.
Syndicate 6131, which began active operations effective January 1, 2018, follows a process similar to Syndicate 1729 for
the establishment of initial reserves. Loss assumptions by risk category incorporated into the 2018 business plan submitted to
Lloyd's were influenced by historical claims experience of the Lloyd's market for similar risks. We expect the loss ratios of
Syndicate 6131 to fluctuate from quarter to quarter as Syndicate 6131 assumes more business from Syndicate 1729 and the
book begins to mature.
35
Development of Prior Accident Years
In addition to setting the initial reserve for the current accident year, each period we reassess the amount of reserve
required for prior accident years.
The foundation of our reserve re-estimation process is an actuarial analysis that is performed by both our internal and
consulting actuaries. This very detailed analysis projects ultimate losses based on partitions which include line of business,
geography, coverage layer and accident year. The procedure uses the most representative data for each partition, capturing its
unique patterns of development and trends. In all there are 200 different partitions of our business for purposes of this analysis.
We believe that the use of consulting actuaries provides an independent view of our loss data as well as a broader perspective
on industry loss trends.
For both the Specialty P&C and Workers' Compensation segments the analysis performed by the consulting actuaries
analyzes each partition of our business in a variety of ways and uses multiple actuarial methodologies in performing these
analyses, including:
• Bornhuetter-Ferguson (Paid and Reported) Method
Paid Development Method
•
• Reported Development Method
• Average Paid Value Method
• Average Reported Value Method
• Backward Recursive Development Method
• The Adjusted Reported and the Adjusted Paid Methods
A brief description of each method follows.
Bornhuetter-Ferguson Method. We use both the Paid and the Reported Bornhuetter-Ferguson methods. The Paid method
assigns partial weight to initial expected losses for each accident year (initial expected losses being the first established case
and IBNR reserves for a specific accident year) and partial weight to paid to date losses. The Reported method assigns partial
weight to the initial expected losses and partial weight to current expected losses. The weights assigned to the initial expected
losses decrease as the accident year matures.
Paid Development and Reported Development Methods. These methods use historical, cumulative losses (paid losses for
the Paid Development Method, reported losses for the Reported Development Method) by accident year and develop those
actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate
cost in a manner that is analogous to prior years, adjusted as deemed appropriate for the expected effects of known changes in
the claim payment environment (and case reserving environment for the Reported Development Method); and to the extent
necessary, supplemented by analyses of the development of broader industry data.
Average Paid Value and Average Reported Value Methods. In these methods, average claim cost data (paid claim cost for
the Average Paid Value Method and reported claim cost for the Reported Value Method) is developed to an ultimate average
cost level by report year based on historical data. Claim counts are similarly developed to an ultimate count level. The average
claim cost (after rounding and adjustment, if necessary, to accommodate report year data that is not considered to be predictive)
is then multiplied by the ultimate claim counts by report year to derive ultimate loss and ALAE.
Backward Recursive Development Method. This method is an extrapolation of the movements in case reserve adequacy in
order to estimate unpaid loss costs. Historical data showing incremental changes to case reserves over progressive time periods
is used to derive factors that represent the ratio of case reserve values at successive maturities. Historical claims payment data
showing the additional payments in progressive time periods is used to derive factors that represent the portion of a case
reserve paid in the following period. Starting from the most mature period, after which all of the case reserve is paid and the
case reserve is exhausted, the next prior ultimate development factor for the prior case reserve can be calculated as the case
factor times the established ultimate development factor plus the paid factor. For each successive prior maturity, the ultimate
development factor is calculated similarly. The result of multiplying the ultimate development factor times the case reserve is
the total indicated unpaid amount.
The Adjusted Reported and the Adjusted Paid Methods. These methods are based on the premise that the relative change
in a given accident year's adjusted reported loss estimates (Adjusted Reported Method) or adjusted paid losses (Adjusted Paid
Method) from one evaluation point to the next is similar to changes observed for earlier accident years at the same evaluation
points. In the Adjusted Reported Method reported loss estimates are adjusted to reflect a common case reserve adequacy basis.
In the Adjusted Paid Method, the historical paid loss experience is adjusted to reflect a common claim settlement rate basis. We
principally use these methods to evaluate reserves for our legal liability coverages.
Generally, methods such as the Bornhuetter-Ferguson method are used on more recent accident years where we have less
data on which to base our analysis. As time progresses and we have an increased amount of data for a given accident year, we
begin to give more confidence to the development and average methods, as these methods typically rely more heavily on our
36
own historical data. These methods emphasize different aspects of loss reserve estimation and provide a variety of perspectives
for our decisions.
Certain of the methodologies utilized to estimate the ultimate losses for each partition of our reserves consider the actual
amounts paid. Paid data is particularly influential when a large portion of known claims have been closed, as is the case for
older accident years. In selecting a point estimate for each partition, management considers the extent to which trends are
emerging consistently for all partitions and known industry trends. Thus, actual, rather than estimated severity trends are given
more consideration. If actual severity trends are lower than those estimated at the time that reserves were previously
established, the recognition of favorable development is indicated. This is particularly true for older accident years where our
actuarial methodologies give more weight to actual loss costs (severity).
The various actuarial methods discussed above are applied in a consistent manner from period to period. In addition, we
perform statistical reviews of claims data such as claim counts, average settlement costs and severity trends when establishing
our reserves.
We utilize the selected point estimates of ultimate losses to develop estimates of ultimate losses recoverable from
reinsurers, based on the terms and conditions of our reinsurance agreements. An overall estimate of the amount receivable from
reinsurers is determined by combining the individual estimates. Our net reserve estimate is the gross reserve point estimate less
the estimated reinsurance recovery.
For our Workers’ Compensation segment, we utilize the reported development method, paid development method and
Bornhuetter-Ferguson method, to develop our reserve for each accident year. The actuarial review includes the stratification of
claims data (lost time claims, medical only claims) using different variations that allow us to identify trends that may not be
readily identifiable if the data was evaluated only in the aggregate. Reported and paid loss development factors are key
assumptions in the reserve estimation process and are based on our historical reported and paid loss development patterns. As
accident years mature, the various actuarial methodologies produce more consistent loss estimates.
For our Lloyd's Syndicate segment we rely on the analysis of actual loss experience on the book of business written by
Syndicate 1729 to determine loss development by accident year.
Acquired Reserve
The acquisition of Eastern on January 1, 2014 increased our loss reserve by $153.2 million which represented the fair
value of Eastern's loss reserve at the time of the acquisition. The fair value of the reserve for losses and loss adjustment
expenses and related reinsurance recoverables was based on an actuarial estimate of the expected future net cash flows, a
reduction of those cash flows for the time value of money determined utilizing the U.S. Treasury Yield Curve, and a risk
adjustment to reflect the net present value of profit that an investor would demand in return for the assumption of the associated
risks. Expected net cash flows were derived from the expected loss payment patterns included in an actuarial analysis of
Eastern's reserve performed as of December 31, 2013. The fair value of the reserve, including the risk margin discussed above,
exceeded the undiscounted loss reserve previously established by Eastern by $9.3 million; this fair value adjustment is being
amortized over the average expected life of the reserve of 6 years. The unamortized fair value adjustment included in the
acquired reserve as of December 31, 2017 was $3.1 million.
Use of Judgment
Even though the actuarial process is highly technical, it is also highly judgmental, both as to the selection of the data used
in the various actuarial methodologies (e.g., initial expected loss ratios and loss development factors) and in the interpretation
of the output of the various methods used. Each actuarial method generally returns a different value and for the more recent
accident years the variations among the various methodologies can be significant. For each partition of our reserves, we
evaluate the results of the various methods, along with the supplementary statistical data regarding such factors as closed with
and without indemnity ratios, claim severity trends, the expected duration of such trends, changes in the legal and legislative
environment and the current economic environment to develop a point estimate based upon management's judgment and past
experience. The series of selected point estimates is then combined to produce an overall point estimate for ultimate losses.
Given the potential for unanticipated volatility for long-tailed lines of business, we are cautious in giving full credibility
to emerging trends that, when more fully mature, may lead to the recognition of either favorable or adverse development of our
losses. There may be trends, both positive and negative, reflected in the numerical data both within our own information and in
the broader marketplace that mitigate or reverse as time progresses and additional data becomes available. This is particularly
true for our HCPL business which has historically exhibited significant volatility as previously discussed.
HCPL. Over the past several years the most influential factor affecting the analysis of our HCPL reserves and the related
development recognized has been the change, or lack thereof, in the severity of claims. The severity trend is an explicit
component of our pricing models, whereas in our reserving process the severity trend's impact is implicit. Our estimate of this
37
trend and our expectations about changes in this trend impact a variety of factors, from the selection of expected loss ratios to
the ultimate point estimates established by management.
Because of the implicit and wide-ranging nature of severity trend assumptions on the loss reserving process it is not
practical to specifically isolate the impact of changing severity trends. However, because severity is an explicit component of
our HCPL pricing process we can better isolate the impact that changing severity can have on our loss costs and loss ratios in
regards our pricing models for this business component. Our current HCPL pricing models assume a severity trend of 2% to
3% in most states and products. We have observed potentially higher severity trends in our case reserve estimates but these
have not been confirmed by actual claim payments. If the severity trend were to be higher by 1 percentage point, the impact
would be an increase in our expected loss ratio for this business of 3.2 percentage points, based on current claim disposition
patterns. An increase in the severity trend of 3 percentage points would result in a 10.1 percentage point increase in our
expected loss ratio. Due to the long-tailed nature of our claims and the previously discussed historical volatility of loss costs,
selection of a severity trend assumption is a subjective process that is inherently likely to prove inaccurate over time. Given the
long tail and volatility, we are generally cautious in making changes to the severity assumptions within our pricing models. All
open claims and accident years are generally impacted by a change in the severity trend, which compounds the effect of such a
change.
For the 2004 to 2009 accident years, both our internal and consulting actuaries observed an unprecedented reduction in
the frequency of HCPL claims (or number of claims per exposure unit) that cannot be attributed to any single factor. Since
2009, claim frequency has been relatively constant, at a lower level than had historically existed. For a number of years, we
believed that much of the reduction in claim frequency was the result of a decline in the filing of non-meritorious lawsuits that
had historically been dismissed or otherwise resulted in no payment of indemnity on behalf of our insureds. With fewer non-
meritorious claims being filed we expected that the claims that were filed had the potential for greater average losses, or greater
severity. To date, however, this effect has not materialized to the extent we anticipated. The uncertainty as to the impact this
decline in frequency might ultimately have on the average cost of claims complicated the selection of an appropriate severity
trend for our pricing model for these lines, and factoring severity into the various actuarial methodologies we use to evaluate
our reserve has been increasingly challenging. Based on the weighted average of payments, typically 91% of our HCPL claims
are resolved after eight years for a given accident year.
Although we remain uncertain regarding the ultimate severity trend to project into the future due to the long-tailed nature
of our business, we have given consideration to observed loss costs in setting our rates. For our HCPL business this practice has
resulted in rate reductions in recent years. For example, on average, excluding our podiatry business acquired in 2009, we have
gradually reduced the premium rates we charge on our standard physician renewal business (our largest HCPL line) by
approximately 16% from the beginning of 2006 to December 31, 2017. Loss ratios for the current accident years have thus
remained fairly constant because expected loss reductions have been reflected in our rates.
Workers' Compensation. The projection of changes in claim severity trend has not historically been an influential factor
affecting our workers' compensation analysis of reserves, as claims are typically resolved more quickly than the industry norm.
As previously mentioned, the determination and calculation of loss development factors, in particular, the selection of tail
factors which are used to extend the projection of losses beyond historical data, requires considerable judgment.
Loss Development
We recognized net favorable reserve development of $134.4 million for the year ended December 31, 2017, of which
$119.3 million related to our Specialty P&C segment, $14.3 million related to our Workers' Compensation segment and $0.8
million related to our Lloyd's Syndicate segment.
Net favorable development recognized within the Specialty P&C segment was primarily attributable to the favorable
resolution of HCPL claims during the period and an evaluation of established case reserves and paid claims data that indicated
that the actual severity trend associated with the remaining HCPL claims is less than we had previously estimated. The
Specialty P&C segment also reflected favorable development of $10.1 million attributable to our medical technology liability
line of business and $5.2 million attributable to our legal professionals liability line of business for the year ended
December 31, 2017.
Net favorable development recognized within the Workers' Compensation segment for 2017 included $5.7 million
attributable to our traditional business of which $1.6 million related to the amortization of the purchase accounting fair value
adjustment. Excluding the purchase accounting fair value adjustment, net favorable development in our traditional business was
$4.1 million which primarily reflected better than expected claims results related to accident years 2015 and 2016. The
remaining net favorable development in our Workers' Compensation segment of $8.6 million was attributable to our SPCs
which are evaluated at the cell level. Because a relatively small number of claims are open per cell, the closing of claims can
affect the actuarial projections for the remaining open claims in the cell to an extent that indicates development should be
recognized for the cell.
38
Net favorable development of $0.8 million recognized within our Lloyd's Syndicate segment in 2017 was attributable to
actual loss experience proving to have been better than the Lloyd's market historical averages for similar risks which were used
to establish initial reserves.
Specialty P&C Segment
Professional Liability
Our professional liability line of business includes both our HCPL and legal professional lines, with our HCPL line
representing the largest component of our reserve. In support of our concern that the decline in frequency will result in a higher
severity trend for our HCPL claims, we saw our closed-with-indemnity-payment ratio (i.e., the number of claims closed with an
indemnity or loss payment as compared to the total number of closed claims) for our claims increase from 10% in 2005 to 15%
in 2017.
While this trend has been in keeping with our expectations, the anticipated increase in severity incorporated into our loss
assumptions has not occurred. Rather, we have experienced lower than expected severity which has been the primary driver of
the favorable development recognized in recent years.
The following table presents additional information about the loss development for our professional liability line of
business:
($ in thousands)
2017
2016
2015
Accident Years
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Prior to 2008
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2017
390,001
392,518
396,426
369,472
392,286
402,348
391,722
384,737
341,409
342,026
6,879,660
Reserve
Development
(favorable)
unfavorable
N/A
3,413
$
$
1,510
$ (15,782)
$ (23,164)
$ (17,187)
$ (18,277)
$ (17,224)
(8,380)
$
$
(1,744)
$ (12,384)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
20.4%
N/A
48.2%
N/A
68.7% $
304
82.3% $ (11,358)
90.4% $ (10,501)
95.3% $ (24,988)
96.4% $ (15,977)
98.7% $ (14,532)
99.0% $ (19,920)
99.4% $ (10,391)
$ (18,283)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
N/A
17.6%
N/A
47.5%
1,546
71.8% $
(9,564)
83.4% $
92.0% $ (21,199)
94.0% $ (24,147)
97.6% $ (17,966)
98.4% $ (25,851)
99.1% $ (16,758)
$ (33,349)
% of Known
Claims
Closed
N/A
N/A
18.0%
51.7%
72.8%
85.1%
90.6%
95.7%
97.1%
98.3%
An extended period of time is required to get a clear estimate of the loss cost for a given accident year. As an example,
looking at the 2012 accident year for our professional liability reserves, we had resolved 85.1% of the known claims by the end
of 2015, 92.0% of the known claims by the end of 2016, and 95.3% of the known claims by the end of 2017. These statistics
are based on the number of reported claims; since many non-meritorious claims are resolved early, percentages of ultimate loss
payments known at the same points in time are considerably lower. A similar pattern can be seen in each open accident year as
demonstrated in the above table.
Historically we have resolved more than 85% of our physician and hospital professional liability claims with no
indemnity payment. As an accident year matures, the number of claims resolved with indemnity payments progressively
increases. In a similar fashion, we typically expend more in loss adjustment expenses (legal fees) as claims mature.
At December 31, 2017, 2016 and 2015 management reserve estimates for the three most recent prior accident years
(which have closed claim percentages at or below 85%) were influenced by the initial reserve estimate set for these years,
moderated to reflect consideration of better than anticipated claims experience observed during the periods. Estimates for older
accident years with higher percentages of closed claims were more heavily influenced by the more moderate severity trend,
particularly with regard to claims closed during the periods.
39
This can be seen in looking at both the absolute amount of favorable reserve development recognized for the less
developed accident years as well as the size of such development when compared to established ultimates for those same
accident years at the end of the preceding calendar year. The following table provides this information for years ended
December 31, 2017, 2016 and 2015 with respect to the three then most recent prior accident years:
($ in millions)
Prior accident years
2017
2014-2016
2016
2013-2015
2015
2012-2014
Net favorable development recognized for the
specified years
Development as a % of established ultimates,
prior calendar year end
$10.9
0.9%
$21.6
1.8%
$29.2
2.3%
Medical Technology Liability
Our medical technology liability line of business has not experienced the change in claim frequency previously described
for HCPL. However, the nature of the risks insured and volatility of the loss experience in this line of business has produced
more variable loss development, as presented in the following table:
($ in thousands)
2017
2016
2015
Accident Years
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Prior to 2008
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2017
14,923
13,587
12,342
13,497
6,839
9,281
14,881
22,882
21,629
42,007
495,064
Reserve
Development
(favorable)
unfavorable
N/A
$
$
$
$
$
$
$
$
$
$
(537)
(1,755)
(187)
(2,622)
(1,251)
92
(1,385)
(1,178)
(351)
(899)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
42.2%
53.3%
79.5% $
92.5% $
96.4% $
96.9% $
73.9% $
96.3% $
95.7% $
99.9% $
$
N/A
N/A
(440)
(845)
(2,400)
(1,826)
(1,591)
(800)
(1,382)
(947)
(1,282)
N/A
26.4%
60.0%
81.7% $
87.7% $
90.5% $
72.0% $
90.6% $
92.2% $
97.2% $
$
N/A
N/A
N/A
608
(171)
(1,097)
(2,315)
(2,104)
(1,551)
(3,341)
(1,726)
N/A
N/A
38.3%
72.6%
86.5%
93.3%
77.4%
94.2%
95.1%
99.7%
Approximately $5.8 million of the $10.1 million total net favorable development recognized in 2017 related to the 2012
to 2015 accident years. The development for the 2012 to 2015 accident years represents a 12.1% reduction to the ultimates
established for those reserves at December 31, 2016. Approximately $5.8 million of the $11.5 million total net favorable
development recognized in 2016 related to the 2011 to 2013 accident years. The development for the 2011 to 2013 accident
years represents a 14.3% reduction to the ultimates established for those reserves at December 31, 2015. Approximately $10.4
million of the $11.7 million total net favorable development recognized in 2015 related to the 2008 to 2012 accident years. The
development for the 2008 to 2012 accident years represents a 7.9% reduction to the ultimates established for those reserves at
December 31, 2014.
In 2017, 2016 and 2015 the development was largely attributable to favorable results from claims closed during the year.
As time has elapsed we have recognized that actual loss experience has on average been better than estimated. We have been
cautious in recognizing the improvement, but as claims have matured and claims are closed or have become more certain for
the remaining open claims, we have revised reserve estimates. We believe the need for a cautious approach is required as
outcomes are uncertain and results can be significantly affected by outcomes for a small number of cases.
40
Workers' Compensation Segment
Claims in our workers’ compensation line of business have historically closed at a faster rate than in our HCPL or medical
technology liability lines of business. This faster disposition rate, along with a lower net retention after the application of
reinsurance, has resulted in less volatility in loss estimates on a net basis. However, a change in the number of individually-
severe claims can create volatility in a given accident year. The following table presents additional information about the loss
development for our workers' compensation line of business:
($ in thousands)
2017
2016
2015
Accident Years
2017
2016
2015
2014
2013
2012
2011
2010
Prior to 2010
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2017
150,772
139,397
134,234
126,421
120,610
100,509
95,441
75,793
423,493
Reserve
Development
(favorable)
unfavorable
N/A
(7,546)
(5,773)
(1,428)
441
(308)
241
(42)
1,710
$
$
$
$
$
$
$
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
(3,452)
77
944
(577)
156
(820)
(782)
37%
82.5%
92.4% $
97.0% $
98.3% $
99.3% $
99.0% $
99.4% $
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
N/A
(85)
1,520
(739)
(263)
605
(1,685)
N/A
41.3%
82.6%
92.5% $
97.1% $
98.4% $
98.9% $
99.3% $
$
% of Known
Claims
Closed
N/A
N/A
45.7%
83.1%
93.0%
96.5%
98.8%
99.1%
We recognized $14.3 million of net favorable development in 2017 which included $8.6 million of net favorable
development at our SPCs and $5.7 million of net favorable development related to our traditional business. Net favorable
development in our traditional business included $1.6 million related to the amortization of the purchase accounting fair value
adjustment. In 2016, we recognized $6.1 million of net favorable development which included $4.5 million of net favorable
development at our SPCs and $1.6 million of net favorable development related to the amortization of the purchase accounting
fair value adjustment for our traditional business. In 2015, we recognized $2.2 million of net favorable development which
included $0.6 million of net unfavorable development at our SPCs primarily related to claims activity prior to the 2009 accident
year and $1.6 million of net favorable development related to the amortization of the purchase accounting fair value adjustment
for our traditional business.
Variability of Loss Reserves
As previously noted, the number of data points and variables considered and the subjective process followed in
establishing our loss reserve makes it impractical to isolate individual variables and demonstrate their impact on our estimate of
loss reserves. However, to provide a better understanding of the potential variability in our reserves, we have modeled implied
reserve ranges around our single point net reserve estimates for our various lines of business assuming different confidence
levels. The ranges have been developed by aggregating the expected volatility of losses across partitions of our business to
obtain a consolidated distribution of potential reserve outcomes. The aggregation of this data takes into consideration
correlations among our geographic and specialty mix of business. The result of the correlation approach to aggregation is that
the ranges are narrower than the sum of the ranges determined for each partition.
We have used this modeled statistical distribution to calculate an 80% and 60% confidence interval for the potential
outcome of our consolidated net reserve for losses. The high and low end points of the distributions are as follows:
80% Confidence Level
60% Confidence Level
Low End Point
Carried Net Reserve
High End Point
$1.351 billion
$1.713 billion
$2.122 billion
$1.452 billion
$1.713 billion
$1.956 billion
Any change in our estimate of net ultimate losses for prior years is reflected in net income in the period in which such
changes are made.
Due to the size of our consolidated reserve for losses and the large number of claims outstanding at any point in time,
even a small percentage adjustment to our total reserve estimate could have a material effect on our results of operations for the
period in which the adjustment is made.
41
Reinsurance
We use insurance and reinsurance (collectively, “reinsurance”) to provide capacity to write larger limits of liability, to
provide reimbursement for losses incurred under the higher limit coverages we offer, to provide protection against losses in
excess of policy limits, and, in the case of risk sharing arrangements, to align our objectives with those of our strategic business
partners and to provide custom insurance solutions for large customer groups. The purchase of reinsurance does not relieve us
from the ultimate risk on our policies, however it does provide reimbursement for certain losses we pay.
We make a determination of the amount of insurance risk we choose to retain based upon numerous factors, including our
risk tolerance and the capital we have to support it, the price and availability of reinsurance, the volume of business, our level
of experience with a particular set of claims and our analysis of the potential underwriting results. We purchase excess of loss
reinsurance to limit the amount of risk we retain and we do so from a number of companies to mitigate concentrations of credit
risk. We utilize reinsurance brokers to assist us in the placement of these reinsurance programs and in the analysis of the credit
quality of our reinsurers. The determination of which reinsurers we choose to do business with is based upon an evaluation of
their then current financial strength, rating and stability.
We evaluate each of our ceded reinsurance contracts at inception to confirm that there is sufficient risk transfer to allow
the contract to be accounted for as reinsurance under current accounting guidance. At December 31, 2017, all ceded contracts
were accounted for as risk transferring contracts.
Our receivable from reinsurers on unpaid losses and loss adjustment expenses represents our estimate of the amount of
our reserve for losses that will be recoverable under our reinsurance programs. We base our estimate of funds recoverable upon
our expectation of ultimate losses and the portion of those losses that we estimate to be allocable to reinsurers based upon the
terms and conditions of our reinsurance agreements. Our assessment of the collectability of the recorded amounts receivable
from reinsurers considers the payment history of the reinsurer, publicly available financial and rating agency data, our
interpretation of the underlying contracts and policies and responses by reinsurers.
Given the uncertainty inherent in our estimates of losses and related amounts recoverable from reinsurers, these estimates
may vary significantly from the ultimate outcome.
Under the terms of certain of our reinsurance agreements, the amount of premium that we cede to our reinsurers is based
in part on the losses we recover under the agreements. Therefore we make an estimate of premiums ceded under these
reinsurance agreements subject to certain maximums and minimums. Any adjustments to our estimates of losses recoverable
under our reinsurance agreements or the premiums owed under our agreements are reflected in then current operations. Due to
the size of our reinsurance balances, an adjustment to these estimates could have a material effect on our results of operations
for the period in which the adjustment is made.
The financial strength of our reinsurers and their ability to pay us may change in the future due to forces or events we
cannot control or anticipate. We have not experienced significant collection difficulties due to the financial condition of any
reinsurer as of December 31, 2017; however, reinsurers may periodically dispute our demand for reimbursement from them
based upon their interpretation of the terms of our agreements. We have established appropriate reserves for any balances that
we believe may not be ultimately collected. Should future events lead us to believe that any reinsurer will not meet its
obligations to us, adjustments to the amounts recoverable would be reflected in the results of current operations. Such an
adjustment has the potential to be material to the results of operations in the period in which it is recorded; however, we would
not expect such an adjustment to have a material effect on our capital position or our liquidity.
Investment Valuations
We record the majority of our investments at fair value as shown in the table below. At December 31, 2017, the
distribution of our investments based on GAAP fair value hierarchies (levels) was as follows:
Investments recorded at:
Fair value
Other valuations
Total Investments
Distribution by GAAP Fair Value Hierarchy
Level 1
Level 2
Level 3
Not
Categorized
Total
Investments
24%
63%
1%
6%
94%
6%
100%
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. All of our fixed maturity and equity security investments are
carried at fair value. Our short-term securities are carried at amortized cost, which approximates fair value.
42
Because of the number of securities we own and the complexity of developing accurate fair values, we utilize multiple
independent pricing services to assist us in establishing the fair value of individual securities. The pricing services provide fair
values based on exchange-traded prices, if available. If an exchange-traded price is not available, the pricing services, if
possible, provide a fair value that is based on multiple broker/dealer quotes or that has been developed using pricing models.
Pricing models vary by asset class and utilize currently available market data for securities comparable to ours to estimate a fair
value for our securities. The pricing services scrutinize market data for consistency with other relevant market information
before including the data in the pricing models. The pricing services disclose the types of pricing models used and the inputs
used for each asset class. Determining fair values using these pricing models requires the use of judgment to identify
appropriate comparable securities and to choose a valuation methodology that is appropriate for the asset class and available
data.
The pricing services provide a single value per instrument quoted. We review the values provided for reasonableness each
quarter by comparing market yields generated by the supplied value versus market yields observed in the marketplace. We also
compare yields indicated by the provided values to appropriate benchmark yields and review for values that are unchanged or
that reflect an unanticipated variation as compared to prior period values. We utilize a primary pricing service for each security
type and compare provided information for consistency with alternate pricing services, known market data and information
from our own trades, considering both values and valuation trends. We also review weekly trades versus the prices supplied by
the services. If a supplied value appears unreasonable, we discuss the valuation in question with the pricing service and make
adjustments if deemed necessary. Historically our review has not resulted in any material changes to the values supplied by the
pricing services. The pricing services do not provide a fair value unless an exchange-traded price or multiple observable inputs
are available. As a result, the pricing services may provide a fair value for a security in some periods but not others, depending
upon the level of recent market activity for the security or comparable securities.
Level 1 Investments
Fair values for a majority of our equity securities and portions of our corporate debt, short term and convertible securities
are determined using exchange-traded prices. There is little judgment involved when fair value is determined using an
exchange-traded price. In accordance with GAAP, for disclosure purposes we classify securities valued using an exchange-
traded price as Level 1 securities.
Level 2 Investments
Most fixed income securities do not trade daily, and thus exchange-traded prices are generally not available for these
securities. However, market information (often referred to as observable inputs or market data, including but not limited to, last
reported trade, non-binding broker quotes, bids, benchmark yield curves, issuer spreads, two sided markets, benchmark
securities, offers and recent data regarding assumed prepayment speeds, cash flow and loan performance data) is available for
most of our fixed income securities. We determine fair value for a large portion of our fixed income securities using available
market information. In accordance with GAAP, for disclosure purposes we classify securities valued based on multiple market
observable inputs as Level 2 securities.
Level 3 Investments
When a pricing service does not provide a value for one of our fixed maturity securities, management estimates fair value
using either a single non-binding broker quote or pricing models that utilize market-based assumptions which have limited
observable inputs. The process involves significant judgment in selecting the appropriate data and modeling techniques to use
in the valuation process. For disclosure purposes, we classify securities valued using limited observable inputs as Level 3
securities.
Fair Values Not Categorized
We hold interests in certain investment funds, primarily LPs/LLCs, which measure fund assets at fair value on a recurring
basis and provide us with a NAV for our interest. As a practical expedient, we consider the NAV provided to approximate the
fair value of the interest. In accordance with GAAP, we do not categorize these investments within the fair value hierarchy.
Nonrecurring Fair Value Measurements
We measure the fair value of certain assets on a nonrecurring basis either quarterly, annually or when events or changes in
circumstances indicate that the carrying amount of the asset may not be recoverable. These assets include cost and equity
method investments, fixed assets, goodwill and other intangible assets.
43
Investments - Other Valuation Methodologies
Certain of our investments, in accordance with GAAP for the type of investment, are measured using methodologies
other than fair value. At December 31, 2017, these investments represented approximately 6% of total investments, and are
detailed in the following table. Additional information about these investments is provided in Notes 2 and 3 of the Notes to
Consolidated Financial Statements.
(In millions)
Carrying Value
GAAP Measurement
Method
Other investments:
Investments in LPs
Other, principally FHLB capital stock
Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships
Equity method investments, primarily LPs/LLCs
$
Cost
Principally Cost
Equity
Equity
55.1
3.5
58.6
90.7
29.1
119.8
BOLI
62.1 Cash surrender value
Total investments - Other valuation methodologies
$
240.5
Other-than-temporary Impairments
We evaluate our available-for-sale investment securities on at least a quarterly basis for the purpose of determining
whether declines in fair value below recorded cost basis represent OTTI. We consider an OTTI to have occurred:
• if there is intent to sell the security;
• if it is more likely than not that the security will be required to be sold before full recovery of its amortized cost
basis; and
• if the entire amortized basis of the security is not expected to be recovered.
The assessment of whether the amortized cost basis of a security, particularly an asset-backed debt security, is expected to
be recovered requires management to make assumptions regarding various matters affecting future cash flows. The choice of
assumptions is subjective and requires the use of judgment. Actual credit losses experienced in future periods may differ from
management’s estimates of those credit losses. Methodologies used to estimate the present value of expected cash flows are:
For non-structured fixed maturities (obligations of states, municipalities and political subdivisions and corporate debt) the
estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether
further principal and interest will be received. We consider various factors in projecting recovery values and recovery time
frames, including the following:
• third-party research and credit rating reports;
• the current credit standing of the issuer, including credit rating downgrades, whether before or after the balance
sheet date;
• the extent to which the decline in fair value is attributable to credit risk specifically associated with the security or
its issuer;
• internal assessments and the assessments of external portfolio managers regarding specific circumstances
surrounding an investment, which indicate the investment is more or less likely to recover its amortized cost than
other investments with a similar structure;
• for asset-backed securities, the origination date of the underlying loans, the remaining average life, the probability
that credit performance of the underlying loans will deteriorate in the future, and our assessment of the quality of the
collateral underlying the loan;
• failure of the issuer of the security to make scheduled interest or principal payments;
• any changes to the rating of the security by a rating agency; and
• recoveries or additional declines in fair value subsequent to the balance sheet date.
For structured securities (primarily asset-backed securities), management estimates the present value of the security’s
cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the
security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). We consider
the most recently available six month averages of the levels of delinquencies, defaults, severities, and prepayments for the
collateral (loans) underlying the securitization or, if historical data is not available, sector based assumptions, to estimate
expected future cash flows of these securities.
44
Exclusive of securities where there is an intent to sell or where it is not more likely than not that the security will be
required to be sold before recovery of its amortized cost basis, OTTI for debt securities is separated into a credit component
and a non-credit component. The credit component of an OTTI is the difference between the security’s amortized cost basis and
the present value of its expected future cash flows, while the non-credit component is the remaining difference between the
security’s fair value and the present value of expected future cash flows. The credit component of the OTTI is recognized in
earnings while the non-credit component is recognized in OCI.
Investments in tax credit partnerships are evaluated for OTTI by considering both qualitative and quantitative factors
which include: whether the current expected cash flows from the investment, primarily tax benefits, are less than those
expected at the time the investment was acquired due to various factors, such as a change in the statutory tax rate, and our
ability and intent to hold the investment until the recovery of its carrying value.
Investments which are accounted for under the equity method are evaluated for impairment whenever events or changes
in circumstances indicate that the carrying value of the investment might not be recoverable. These circumstances include, but
are not limited to, evidence of the inability to recover the carrying value of the investment, the inability of the investee to
sustain an earnings capacity that would justify the carrying value of the investment or the current fair value of the investment
that is less than the carrying value.
Investments in LPs/LLCs which are not accounted for under the equity method are evaluated for impairment by
comparing our carrying value to the NAV of our interest as reported by the LP/LLC. Additionally, management considers the
performance of the LP/LLC relative to the market and its stated objectives, cash flows expected from the interest and the
audited financial statements of the LP/LLC, if available.
We recognize OTTI, exclusive of non-credit OTTI, in earnings as a part of net realized investment gains (losses). In
subsequent periods, any measurement of gain, loss or impairment is based on the revised amortized basis of the security. Non-
credit OTTI on debt securities and declines in fair value of available-for-sale securities not considered to be other-than-
temporary are recognized in OCI.
Asset-backed debt securities that have been impaired due to credit or are below investment grade quality are accounted
for under the effective yield method. Under the effective yield method, estimates of cash flows expected over the life of asset-
backed securities are then used to recognize income on the investment balance for subsequent accounting periods.
Deferred Policy Acquisition Costs
Policy acquisition costs (primarily commissions, premium taxes and underwriting salaries) which are directly related to
the successful acquisition of new and renewal premiums are capitalized as DPAC and charged to expense, net of ceding
commissions earned, as the related premium revenue is recognized. We evaluate the recoverability of our DPAC at the segment
level each reporting period, and any amounts estimated to be unrecoverable are charged to expense in the current period. As of
December 31, 2017 we have not determined that any amounts are unrecoverable.
Deferred Taxes
Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and
liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Our temporary
differences principally relate to our loss reserve, unearned premiums, DPAC, unrealized investment gains (losses) and basis
differences on fixed assets and investment assets. Deferred tax assets and liabilities are measured using the enacted tax rates
expected to be in effect when such benefits are realized. We review our deferred tax assets quarterly for impairment. If we
determine that it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation allowance is
recorded to reduce the carrying value of the asset. In assessing the need for a valuation allowance, management is required to
make certain judgments and assumptions about our future operations based on historical experience and information as of the
measurement period regarding reversal of existing temporary differences, carryback capacity, future taxable income (including
its capital and operating characteristics) and tax planning strategies.
In 2017 and 2016, a valuation allowance was established against the full value of the deferred tax asset related to the NOL
carryforwards for the U.K. operations as management concluded that it was more likely than not that the deferred tax asset will
not be realized. See further discussion in Note 5 of the Notes to Consolidated Financial Statements.
Tax Cuts and Jobs Act
The TCJA was signed into law on December 22, 2017 and contains several key provisions that impact our business,
including the reduction of the corporate tax rate to 21% effective January 1, 2018, the reduction in the amount of executive
compensation that could qualify as a tax deduction, a minimum tax on payments made to related foreign entities and a change
in how property and casualty taxpayers discount loss reserves. Under current accounting guidance, the effects of changes in tax
45
rates and laws are recognized in the period in which the new legislation is enacted. However, due to the timing of the enactment
of the TCJA and its proximity to December 31, 2017, the SEC issued SAB 118 which provides a framework for companies to
account for uncertainties in applying the provisions of the TCJA. SAB 118 allows companies to record a provisional amount in
situations where a company does not have the necessary information available but can make a reasonable estimate. In situations
where companies cannot make a reasonable estimate due to various factors, including lack of information, a provisional amount
is not recorded. Instead, companies will continue to apply current accounting guidance based on the provision of the tax laws
that were in effect immediately prior to the TCJA being enacted. The measurement period, as defined in SAB 118 for the
TCJA, begins on the enactment date of the TCJA and ends when a company has obtained, prepared and analyzed the
information that was needed in order to complete the accounting requirements under current accounting guidance. However,
under no circumstances will the measurement period extend beyond one year from the enactment date of the TCJA.
Other than the areas discussed below, we were able to complete the accounting under the new provisions of the TCJA for
the remeasurement of our deferred tax assets and liabilities based on the newly enacted tax rate and recognized a charge of $6.5
million, which is included as a component of income tax expense from continuing operations for the year ended December 31,
2017.
Provisional amount
At December 31, 2017, we had not completed the accounting for the tax effects of enactment of the TCJA for certain
areas of our tax provision. As it relates to the limitation on the future deductibility of certain executive compensation, we have
made a reasonable estimate of the effects on our existing deferred tax asset balances at December 31, 2017. This estimate was
recorded as a provisional charge of $3.5 million, which is included as a component of income tax expense from continuing
operations for the year ended December 31, 2017. Any future guidance from the IRS addressing the effects of the TCJA on
executive compensation could result in a change to this provisional amount.
Provisional amount not reasonably estimable
The TCJA requires property and casualty taxpayers to discount loss reserves based solely on IRS factors and no longer by
reference to historical payment patterns. As the IRS has yet to release the 2018 discount factors, we have been unable to
reasonably estimate the impact of the change in loss reserve discounting factors and therefore have not adjusted our deferred
tax balances at December 31, 2017 for the impact of these changes due to the TCJA. As prescribed by SAB 118, we continue to
utilize the discount factors based on existing accounting guidance and the provisions of the tax laws that were in effect
immediately prior to enactment of the TCJA. Once the IRS has released the 2018 loss reserve discount factors, we will
complete our analysis and include the effect of the difference in the reserve discount factors in the period the analysis is
complete or the impact is reasonably estimable. See Note 5 of the Notes to Consolidated Financial Statements for further
information.
Effective January 1, 2018, the TCJA introduces a minimum tax on payments made to related foreign entities referred to as
the BEAT. The BEAT is imposed by adding back into the U.S. tax base any base erosion payment made by the U.S. taxpayer to
a related foreign entity and applying a minimum tax rate to this newly calculated modified taxable income. Base erosion
payments represent any amount paid or accrued by the U.S. taxpayer to a related foreign entity to which a deduction is allowed.
Premiums we cede to the SPCs at our wholly owned Cayman Islands reinsurance subsidiary, Eastern Re, fall within the scope
of base erosion payments and therefore could be significantly impacted by the BEAT. We are currently evaluating the financial
and operational impact the BEAT may have on the business ceded to Eastern Re.
Unrecognized Tax Benefits
We evaluate tax positions taken on tax returns and recognize positions in our financial statements when it is more likely
than not that we will sustain the position upon resolution with a taxing authority. If recognized, the benefit is measured as the
largest amount of benefit that has a greater than 50% probability of being realized. We review uncertain tax positions each
period, considering changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and
developments in case law, and make adjustments as we consider necessary. Adjustments to our unrecognized tax benefits may
affect our income tax expense, and settlement of uncertain tax positions may require the use of cash. Other than differences
related to timing, no significant adjustments were considered necessary during 2017 or 2016. At December 31, 2017, our
liability for unrecognized tax benefits approximated $5.3 million.
46
Goodwill
We evaluate goodwill for impairment annually on October 1 and upon the occurrence of certain triggering events or
substantive changes in circumstances that indicate the fair value of goodwill may be impaired. Impairment of goodwill is tested
at the reporting unit level, which is consistent with the reportable segments identified in Note 15 of the Notes to Consolidated
Financial Statements. Of the four reporting units, two have goodwill - Specialty P&C and Workers' Compensation.
When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a
reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment
is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise no further analysis
is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step
quantitative impairment test.
In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying
value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for
purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and
liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit's goodwill
exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.
When performing the two-step quantitative impairment test, we estimate the fair value of our reporting units using the
income and market approaches. The estimate of fair value derived from the income approach is based on the present value of
expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital determined
separately for each reporting unit. The estimate of fair value derived from the market approach is based on earnings multiple
data. The determination of fair value involves the use of significant estimates and assumptions, including revenue growth rates,
operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rates,
comparable public companies and synergistic benefits available to market participants. In addition, we make certain judgments
and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each
reporting unit. To corroborate the reporting units’ valuation, we perform a reconciliation of the estimate of the aggregate fair
value of the reporting units to ProAssurance's market capitalization, including consideration of a control premium.
As of the most recent evaluation date on October 1, 2017, we performed a qualitative goodwill impairment assessment for
both of our Specialty P&C and Workers' Compensation segments. Our Specialty P&C and Workers' Compensation segments
have historically had an excess of fair value over book value and based on current operations are expected to continue to do so;
therefore, our annual impairment test for both segments was performed qualitatively. In applying the qualitative approach,
management considered macroeconomic factors, industry and market conditions, cost factors that could have a negative impact
on the reporting units, actual financial performance of the reporting units versus expectations and management's future business
expectations. As a result of the qualitative assessments, management concluded that it was not more likely than not that the fair
value of the reporting unit was less than its carrying value as of the testing date; therefore, no further impairment testing was
required. No goodwill impairment was recorded in 2017, 2016 or 2015.
Intangibles
Intangible assets with definite lives are amortized over the estimated useful life of the asset. Amortizable intangible assets
primarily consist of agency and policyholder relationships, renewal rights and trade names. Intangible assets with an indefinite
life, primarily state licenses, are not amortized. Intangible assets are evaluated for impairment on an annual basis. Additional
information regarding intangible assets is included in Note 1 of the Notes to Consolidated Financial Statements.
Audit Premium
Workers’ compensation premiums are determined based upon the payroll of the insured, applicable premium rates and an
experience-based modification factor, where applicable. An audit of the policyholders’ records is conducted after policy
expiration to make a final determination of applicable premiums. Audit premium due from or due to a policyholder as a result
of an audit is reflected in net premiums written and earned when billed. We track, by policy, the amount of additional premium
billed in final audit invoices as a percentage of payroll exposure and use this information to estimate the probable additional
amount of EBUB premium as of the balance sheet date. We include changes to the EBUB premium estimate in net premiums
written and earned in the period recognized.
Lloyd’s Premium Estimates
For certain insurance policies and reinsurance contracts written in our Lloyd’s Syndicate segment, premiums are initially
recognized based upon estimates of ultimate premium. Ultimate premium represents the total expected premium to be written
47
under binder authority and certain assumed reinsurance agreements. These estimates of ultimate premium are judgmental and
are dependent upon certain assumptions, including historical premium trends for similar agreements. As reports are received
from programs, ultimate premium estimates are revised, if necessary, with changes reflected in current operations.
Accounting Changes
Other than changes due to the enactment of the TCJA, we did not adopt any accounting changes or have any change in
accounting estimate or policy that had a material effect on our results of operations or financial position during 2017. As of
December 31, 2017, we are not aware of any accounting changes not yet adopted that would have a material effect on our
results of operations or financial position. Note 1 of the Notes to Consolidated Financial Statements provides additional detail
regarding accounting changes.
48
Liquidity and Capital Resources and Financial Condition
Overview
ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. As a
holding company our principal source of external revenue is our investment revenues. In addition, dividends from our operating
subsidiaries represent a significant source of funds for our obligations, including debt service and shareholder dividends. At
December 31, 2017, we held cash and liquid investments of approximately $396 million outside our insurance subsidiaries that
were available for use without regulatory approval or other restriction, of which $267 million was used to pay shareholder
dividends in January 2018. We also have an additional $105 million in permitted borrowings under our Revolving Credit
Agreement, which includes $28 million of the balance outstanding at December 31, 2017 that was repaid as of February 16,
2018. Additionally, we have available an accordion feature which, if subscribed successfully, would allow another $50 million
in available funds as discussed in this section under the heading "Debt."
During 2017, our operating subsidiaries paid dividends to us of approximately $360 million, including extraordinary
dividends from our insurance subsidiaries of approximately $200 million. Our insurance subsidiaries, in the aggregate, are
permitted to pay dividends of approximately $137 million over the course of 2018 without prior approval of state insurance
regulators. However, the payment of any dividend requires prior notice to the insurance regulator in the state of domicile, and
the regulator may reduce or prevent the dividend if, in its judgment, payment of the dividend would have an adverse effect on
the surplus of the insurance subsidiary. We make the decision to pay dividends from an insurance subsidiary based on the
capital needs of that subsidiary, and may pay less than the permitted dividend or may also request permission to pay an
additional amount (an extraordinary dividend).
Cash Flows
Cash flows between periods compare as follows:
(In thousands)
2017 vs 2016
2016 vs 2015
2015 vs 2014
Year Ended December 31
Increase (decrease) in net cash provided (used) by:
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
$
$
(20,124) $
503,606
(342,581)
$ 140,901
57,996
(506,726)
280,917
$ (167,813) $
15,122
(39,193)
474
(23,597)
The principal components of our operating cash flows are the excess of premiums collected and net investment income
over losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the
payment of losses associated with the premiums. Premiums are generally collected within the twelve-month period after the
policy is written, while our claim payments are generally paid over a more extended period of time. Likewise, timing delays
exist between the payment of claims and the collection of any associated reinsurance recoveries.
The decrease in operating cash flows in 2017 as compared to 2016 was primarily driven by an increase in tax payments of
$25.1 million and an increase in cash paid for other underwriting and operating expenses of approximately $17.0 million. The
increase in tax payments was due to the effect of a $15.0 million tax refund received in 2016 for the 2015 tax year and a $10.1
million increase in 2017 estimated tax payments. The increase in cash paid for other underwriting and operating expenses was
primarily due to an increase in policy acquisition costs and an increase in cash paid for interest, primarily due to an increase in
our weighted average outstanding debt. These decreases in operating cash flows were partially offset by an increase in premium
receipts of $16.1 million, driven by our Workers' Compensation segment, and a decrease in loss payments of $11.9 million,
driven by our Specialty P&C segment.
The increase in operating cash flows in 2016 as compared to 2015 was primarily due to a decrease in net tax payments
driven by a $35.5 million reduction in estimated tax payments and a $15.0 million refund received in 2016 for the 2015 tax
year. In addition, the increase reflected premium receipts of $11.8 million from a novation entered into during the fourth quarter
of 2016 (see further discussion under the heading "Gross Premiums Written" within our Segment Operating Results - Specialty
Property & Casualty section that follows).
The increase in operating cash flows in 2015 as compared to 2014 was primarily due to an increase in cash contributed by
our Lloyd's Syndicate operations of $18.3 million and a decrease in loss payments of $34.5 million, partially offset by a
decrease in cash received from investment income of $24.3 million and an increase in tax payments of $18.9 million. The
increase in tax payments during 2015 primarily reflected the effect of a $30.5 million tax refund received in 2014, slightly
offset by a $13.0 million decrease in 2015 estimated tax payments.
49
We manage our investing cash flows to ensure that we will have sufficient liquidity to meet our obligations, taking into
consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as
well as the expected cash flows to be generated by our operations as discussed in this section under the heading "Investing
Activities and Related Cash Flows."
Our financing cash flows are primarily composed of dividend payments, borrowings and repayments under our Revolving
Credit Agreement and repurchases of common stock. See further discussion of our financing activities in this section under
"Financing Activities and Related Cash Flows."
Operating Activities and Related Cash Flows
Losses
The following table, known as the Analysis of Reserve Development, presents information over the preceding ten years
regarding the payment of our losses as well as changes to (the development of) our estimates of losses during that time period.
As noted in the table, we have completed various acquisitions over the ten year period which have affected original and re-
estimated gross and net reserve balances as well as loss payments.
The table includes losses on both a direct and an assumed basis and is net of anticipated reinsurance recoverables. The
gross liability for losses before reinsurance, as shown on the balance sheet, and the reconciliation of that gross liability to
amounts net of reinsurance are reflected below the table. We do not discount our reserve for losses to present value.
Information presented in the table is cumulative and, accordingly, each amount includes the effects of all changes in amounts
for prior years. The table presents the development of our balance sheet reserve for losses; it does not present accident year or
policy year development data. Conditions and trends that have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on this
table.
The following may be helpful in understanding the Analysis of Reserve Development:
• The line entitled “Reserve for losses, undiscounted and net of reinsurance recoverables” reflects our reserve for losses
and loss adjustment expense, less the receivables from reinsurers, each as reported in our consolidated financial
statements at the end of each year (the Balance Sheet Reserves).
• The section entitled “Cumulative net paid, as of” reflects the cumulative amounts paid as of the end of each
succeeding year with respect to the previously recorded Balance Sheet Reserves.
• The section entitled “Re-estimated net liability as of” reflects the re-estimated amount of the liability previously
recorded as Balance Sheet Reserves that includes the cumulative amounts paid and an estimate of the remaining net
liability based upon claims experience as of the end of each succeeding year (the Net Re-estimated Liability).
• The line entitled “Net cumulative redundancy (deficiency)” reflects the difference between the previously recorded
Balance Sheet Reserve for each applicable year and the Net Re-estimated Liability relating thereto as of the end of the
most recent fiscal year.
50
(In thousands)
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Analysis of Reserve Development
December 31
Reserve for losses, undiscounted and net
of reinsurance recoverables
Cumulative net paid, as of:
One Year Later
Two Years Later
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Re-estimated net liability as of:
End of Year
One Year Later
Two Years Later
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
$ 2,232,596
$ 2,111,112
$ 2,159,571
$ 2,136,664
$ 2,000,114
$ 1,860,076
$ 1,825,304
$ 1,820,300
$ 1,755,976
$ 1,719,953
$ 1,712,796
312,348
550,042
694,113
777,114
833,471
874,479
898,646
911,961
917,797
921,129
2,232,596
2,047,344
1,829,140
1,596,508
1,357,126
1,185,051
1,084,422
1,041,623
1,011,674
992,015
978,633
278,655
468,277
584,410
666,105
724,377
758,863
778,795
790,950
796,125
2,111,112
1,903,812
1,665,832
1,383,189
1,154,552
1,019,407
961,808
915,935
885,698
871,466
291,654
476,682
614,369
706,091
761,659
793,528
811,333
821,435
2,159,571
1,925,581
1,615,603
1,362,538
1,172,091
1,086,027
1,012,597
961,987
940,035
264,597
491,657
639,220
737,253
789,965
828,043
844,810
2,136,664
1,810,799
1,543,650
1,324,906
1,205,737
1,111,591
1,050,549
1,010,802
300,703
526,903
682,576
763,703
821,742
852,119
311,835
563,805
704,795
800,189
852,873
2,000,114
1,728,076
1,498,158
1,342,996
1,224,597
1,148,793
1,091,646
1,860,076
1,644,203
1,472,259
1,331,828
1,231,337
1,157,493
343,197
571,690
732,892
826,384
390,849
646,878
804,624
383,062
633,246
369,682
1,825,304
1,644,516
1,483,378
1,358,560
1,252,605
1,820,300
1,659,120
1,519,078
1,396,130
1,755,976
1,612,198
1,485,357
1,719,953
1,585,593
Net cumulative redundancy (deficiency)
$ 1,253,963
$ 1,239,646
$ 1,219,536
$ 1,125,862
$
908,468
$
702,583
$
572,699
$
424,170
$
270,619
$
134,360
Original gross liability - end of year
$ 2,559,707
$ 2,379,468
$ 2,422,230
$ 2,414,100
$ 2,247,772
$ 2,051,428
$ 2,072,822
$ 2,058,266
$ 2,005,326
$ 1,993,428
Reinsurance recoverables
(327,111)
(268,356)
(262,659)
(277,436)
(247,658)
(191,352)
(247,518)
(237,966)
(249,350)
(273,475)
Original net liability - end of year
$ 2,232,596
$ 2,111,112
$ 2,159,571
$ 2,136,664
$ 2,000,114
$ 1,860,076
$ 1,825,304
$ 1,820,300
$ 1,755,976
$ 1,719,953
Gross re-estimated liability - latest
$ 1,214,306
$ 1,016,303
$ 1,066,624
$ 1,142,569
$ 1,226,131
$ 1,287,377
$ 1,423,461
$ 1,590,748
$ 1,714,529
$ 1,858,768
Re-estimated reinsurance recoverables
(235,673)
(144,837)
(126,589)
(131,767)
(134,485)
(129,884)
(170,856)
Net re-estimated liability - latest
$
978,633
$
871,466
$
940,035
$ 1,010,802
$ 1,091,646
$ 1,157,493
$ 1,252,605
(194,618)
$ 1,396,130
(229,172)
$ 1,485,357
(273,175)
$ 1,585,593
Gross cumulative redundancy (deficiency) $ 1,345,401
$ 1,363,165
$ 1,355,606
$ 1,271,531
$ 1,021,641
$
764,051
$
649,361
$
467,518
$
290,797
$
134,660
See table notes on following page.
51
Table Notes
• Reserves for 2009 and thereafter include gross and net reserves acquired in 2009 business combinations of $169.4
million and $163.9 million, respectively.
• Reserves for 2010 and thereafter include gross and net reserves acquired in 2010 business combinations of $88.1
million and $82.2 million, respectively.
• Reserves for 2012 and thereafter include gross and net reserves acquired in 2012 business combinations of $21.8
million and $19.2 million, respectively, which considers reductions of $3.6 million and $3.3 million, respectively,
recorded in 2013 due to the re-estimation of the fair value of the acquired reserves.
• Reserves for 2013 include gross and net reserves acquired in 2013 business combinations of $201.1 million and
$126.0 million, respectively.
• Reserves for 2014 include gross and net reserves acquired in 2014 business combinations of $153.2 million and
$139.5 million, respectively.
In each year reflected in the table, we have estimated our reserve for losses utilizing the management and actuarial processes
discussed under the heading "Reserve for Losses and Loss Adjustment Expenses" in the Critical Accounting Estimates section.
Factors that have contributed to the variation in loss development are primarily related to the extended period of time required
to resolve professional liability claims and include the following:
• The HCPL legal environment deteriorated in the late 1990’s and severity began to increase at a greater pace than
anticipated in our rates and reserve estimates. We addressed the adverse severity trends through increased rates, stricter
underwriting and modifications to claims handling procedures, and reflected this adverse severity trend when we
established our initial reserves for subsequent years.
• These adverse severity trends later moderated, with that moderation becoming more pronounced beginning in 2009.
We have been cautious in giving full recognition to indications that the pace of severity increase had slowed, however
we have given measured recognition of the improved trend in our reserve estimates, as discussed more fully under the
heading “Reserve for Losses and Loss Adjustment Expenses" in the Critical Accounting Estimates section (reserve for
losses or reserve). The favorable development was most pronounced for years 2004 to 2008, as the initial reserves for
these accident years were established prior to substantial indication that severity trends were moderating. We have
given stronger recognition to the lower severity trend as time has elapsed and a greater percentage of claims have
closed.
• A general decline in claim frequency has also been a contributor to favorable loss development. A significant portion
of our policies through 2003 were issued on an occurrence basis, and a smaller portion of our ongoing business results
from the issuance of extended reporting endorsements which have occurrence-like exposure. As claim frequency
declined, the number of reported claims related to these coverages was less than originally expected.
52
Activity in our net reserve for losses during 2017, 2016 and 2015 is summarized below:
Balance, beginning of year
(In thousands)
Less reinsurance recoverables on unpaid losses and
loss adjustment expenses
Net balance, beginning of year
Net losses:
Current year
Favorable development of reserves established in
prior years, net
Total
Paid related to:
Current year
Prior years
Total paid
Net balance, end of year
Plus reinsurance recoverables on unpaid losses and loss
adjustment expenses
Balance, end of year
Year Ended December 31
2017
1,993,428
$
2016
2,005,326
$
2015
2,058,266
$
273,475
1,719,953
249,350
1,755,976
237,966
1,820,300
603,518
587,007
571,891
(134,360)
469,158
(106,633)
(369,682)
(476,315)
1,712,796
(143,778)
443,229
(96,190)
(383,062)
(479,252)
1,719,953
335,585
273,475
$
2,048,381
$
1,993,428
$
(161,180)
410,711
(84,186)
(390,849)
(475,035)
1,755,976
249,350
2,005,326
At December 31, 2017 our gross reserve for losses included case reserves of approximately $1.2 billion and IBNR
reserves of approximately $0.8 billion. Our consolidated gross reserve for losses on a GAAP basis exceeds the combined gross
reserves of our insurance subsidiaries on a statutory basis by approximately $0.2 billion, which is principally due to the portion
of the GAAP reserve for losses that is reflected for statutory accounting purposes as unearned premiums. These unearned
premiums are applicable to extended reporting endorsements (“tail” coverage) issued without a premium charge upon death,
disability or retirement of an insured who meets certain qualifications.
Reinsurance
Within our Specialty P&C segment, we use insurance and reinsurance (collectively, “reinsurance”) to provide capacity to
write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages we offer and to
provide protection against losses in excess of policy limits. Within our Workers' Compensation segment, we use reinsurance to
reduce our net liability on individual risks, to mitigate the effect of significant loss occurrences (including catastrophic events),
to stabilize underwriting results, and to increase underwriting capacity by decreasing leverage. In both the Specialty P&C and
Workers' Compensation segments, we use reinsurance in risk sharing arrangements, to align our objectives with those of our
strategic business partners and to provide custom insurance solutions for large customer groups. We have a quota share
arrangement with Syndicate 1729 established to provide an initial premium base for Syndicate 1729 which was not renewed on
January 1, 2018. The purchase of reinsurance does not relieve us from the ultimate risk on our policies; however, it does
provide reimbursement for certain losses we pay. We pay our reinsurers a premium in exchange for reinsurance of the risk. In
the majority of our excess of loss arrangements, the premium due to the reinsurer is determined by the loss experience of the
business reinsured, subject to certain minimum and maximum amounts. Until all loss amounts are known, we estimate the
premium due to the reinsurer. Changes to the estimate of premium owed under reinsurance agreements related to prior periods
are recorded in the period in which the change in estimate occurs and can have a significant effect on net premiums earned.
We generally reinsure risks under treaties (our excess of loss reinsurance arrangements) pursuant to which the reinsurers
agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the maximum
individual limits offered. These arrangements are negotiated and renewed annually. Renewal dates for our healthcare
professional liability, medical technology liability and workers' compensation treaties are October 1, January 1 and May 1,
respectively. There were no significant changes in the cost or structure of our professional liability and medical technology
liability treaties which renewed October 1, 2017 and January 1, 2018, respectively. Our workers' compensation treaty renewed
May 1, 2017 at a slightly higher rate than the previous agreement. The significant coverages provided by our current excess of
loss reinsurance arrangements are detailed in the following table.
53
Excess of Loss Reinsurance Agreements
Professional
Liability
Medical Technology & Life
Sciences Products
Workers'
Compensation - Traditional
(1) Historically, retention has ranged from 5% to 32.5%.
(2) Historically, retention has been as high as $2M.
Large professional liability risks that are above the limits of our basic reinsurance treaties are reinsured on a facultative
basis, whereby the reinsurer agrees to insure a particular risk up to a designated limit. We also have in place a number of risk
sharing arrangements that apply to the first $1 million of losses for certain large healthcare systems and other insurance entities
and with certain insurance agencies that produce business for us.
During 2017, we wrote workers' compensation and healthcare professional liability policies in our alternative market
business generating premium of approximately $78.2 million. These policies are reinsured to the SPCs of our wholly owned
subsidiary, Eastern Re, domiciled in the Cayman Islands, net of a ceding commission. The alternative market workers'
compensation policies are ceded to the SPCs under 100% quota share reinsurance agreements and then further reinsured under
an excess of loss reinsurance arrangement. The alternative market professional liability policies are ceded to the SPCs under
either excess of loss or quota share reinsurance agreements, depending on the structure of the individual program, and the
portion of the risk that is not ceded to an SPC may also be reinsured under our standard healthcare professional liability
reinsurance program depending on the policy limits provided. The remaining premium written in our alternative market
business of $6.8 million in 2017 is 100% ceded to unaffiliated captive insurers.
Each SPC has preferred shareholders or participants and the underwriting profit or loss of each cell accrues fully to these
preferred shareholders or participants. We participate as either a preferred shareholder or participant in certain SPCs. As of
December 31, 2017, our ownership interest in the SPCs in which we participate is as low as 25% and as high as 85%.
54
As previously discussed, for the workers' compensation business ceded to Eastern Re each SPC has in place its own
reinsurance arrangements, which are illustrated in the following table.
Segregated Portfolio Cell Reinsurance
Per Occurrence Coverage
Aggregate Coverage
(1) ProAssurance assumes 100% of aggregate losses in excess of an aggregate attachment point with a maximum loss
limit of $100K.
(2) The attachment point is based on a percentage of premium (average is 89%) and varies by cell.
Each SPC maintains a loss fund initially equal to the difference between premium assumed by the cell and the ceding
commission. The external owners of each cell provide a letter of credit to us that is initially equal to the difference between the
loss fund of the SPC (amount of funds available to pay losses after deduction of ceding commission) and the aggregate
attachment point of the reinsurance. Over time, a SPC's retained profits are considered in the determination of the collateral
amount required to be provided by the cell's external owners.
Within our Lloyd's Syndicate segment, Syndicate 1729 utilizes reinsurance to provide capacity to write larger limits of
liability on individual risks, to provide protection against catastrophic loss and to provide protection against losses in excess of
policy limits. The level of reinsurance that Syndicate 1729 purchases is dependent on a number of factors, including its
underwriting risk appetite for catastrophic exposure, the specific risks inherent in each line or class of business written and the
pricing, coverage and terms and conditions available from the reinsurance market. Reinsurance protection by line of business is
as follows:
• Reinsurance is utilized on a per risk basis for the property insurance and casualty coverages in order to mitigate
risk volatility.
• Catastrophic protection is utilized on both our property insurance and casualty coverages to protect against losses
in excess of policy limits as well as natural catastrophes.
• Both quota share reinsurance and excess of loss reinsurance are utilized to manage the net loss exposure on our
property reinsurance coverages.
• Property umbrella excess of loss reinsurance is utilized for peak catastrophe and frequency of catastrophe
exposures.
55
• Beginning in 2018, external excess of loss reinsurance will be utilized by Syndicate 1729 to manage the net loss
exposure on our specialty property and contingency coverages ceded to Syndicate 6131 (see further discussion in
Segment Operating Results - Lloyd’s Syndicate section that follows).
Syndicate 1729 may still be exposed to losses that exceed the level of reinsurance purchased as well as to reinstatement
premiums triggered by losses exceeding specified levels. Cash demands on Syndicate 1729 can vary significantly depending on
the nature and intensity of a loss event. For significant reinsured catastrophe losses, the inability or unwillingness of the
reinsurer to make timely payments under the terms of the reinsurance agreement could have an adverse effect on Syndicate
1729's liquidity.
For all of our segments, we make a determination of the amount of insurance risk we choose to retain based upon
numerous factors, including our risk tolerance and the capital we have to support it, the price and availability of reinsurance,
the volume of business, our level of experience with a particular set of claims and our analysis of the potential underwriting
results. We purchase excess of loss reinsurance to limit the amount of risk we retain and we do so from a number of companies
to mitigate concentrations of credit risk. We utilize reinsurance brokers to assist us in the placement of these reinsurance
programs and in the analysis of the credit quality of our reinsurers. The determination of which reinsurers we choose to do
business with is based upon an evaluation of their then current financial strength, rating and stability. However, the financial
strength of our reinsurers and their corresponding ability to pay us may change in the future due to forces or events we cannot
control or anticipate. As of December 31, 2017, there is no reinsurer, on an individual basis, for which our recoverables for both
paid and unpaid claims (net of amounts due to the reinsurer) and our prepaid balances are aggregately $29 million or more.
Litigation
We are involved in various legal actions related to insurance policies and claims handling including, but not limited to,
claims asserted against us by policyholders. These types of legal actions arise in the ordinary course of business and, in
accordance with GAAP for insurance entities, are generally considered as a part of our loss reserving process, which is
described in detail in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment
Expenses." We also have other direct actions against the Company unrelated to our claims activity which we evaluate and
account for as a part of our other liabilities. For these corporate legal actions, we evaluate each case separately and establish
what we believe is an appropriate reserve based on GAAP guidance related to contingent liabilities. As of December 31, 2017
there were no material reserves established for corporate legal actions.
Taxes
We are subject to the tax laws and regulations of the U.S. and U.K. We file a consolidated U.S. federal income tax return
that includes the holding company and its U.S. subsidiaries. Our filing obligations include a requirement to make quarterly
payments of estimated taxes to the IRS using the corporate tax rate effective for the tax year. The TCJA was signed into law on
December 22, 2017. Due to its enactment date, the TCJA had no material effect on our liquidity for the year ended
December 31, 2017.
56
Investing Activities and Related Cash Flows
Our investments at December 31, 2017 and December 31, 2016 are comprised as follows:
December 31, 2017
December 31, 2016
Carrying
Value
% of Total
Investment
Carrying
Value
% of Total
Investment
($ in thousands)
Fixed maturities, available for sale:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other asset-backed securities
$
133,627
20,956
632,243
1,167,158
197,844
26,703
101,711
4% $
1%
17%
31%
5%
1%
3%
146,539
30,235
800,463
1,278,991
217,906
32,394
106,878
Total fixed maturities, available for sale
2,280,242
62%
2,613,406
Equity securities, trading
Short-term investments
BOLI
Investment in unconsolidated subsidiaries
Other investments
Total Investments
470,609
432,126
62,113
330,591
110,847
$ 3,686,528
13%
12%
1%
9%
387,274
442,084
60,134
340,906
3%
81,892
100% $ 3,925,696
The distribution of our investments in fixed-maturity securities by rating were as follows:
4%
1%
20%
33%
5%
1%
3%
67%
10%
11%
1%
9%
2%
100%
($ in thousands)
December 31, 2017
December 31, 2016
Carrying
Value
% of Total
Investment
Carrying
Value
% of Total
Investment
Rating*
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
Below investment grade
Not rated
Total
$
617,091
183,221
173,488
195,110
210,263
296,852
202,581
103,023
100,025
48,207
119,310
31,071
$ 2,280,242
27% $
8%
8%
9%
9%
13%
9%
4%
4%
2%
6%
676,815
213,892
227,076
243,562
271,534
282,530
221,139
132,705
115,867
54,366
146,071
1%
27,849
100% $ 2,613,406
26%
8%
9%
9%
10%
11%
9%
5%
4%
2%
6%
1%
100%
*Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright ©2017, S&P Global Market
Intelligence
A detailed listing of our investment holdings as of December 31, 2017 is located under the Financial Information heading
on the Investor Relations page of our website which can be reached directly at www.proassurance.com/investmentholdings, or
through links from the Investor Relations section of our website, investor.proassurance.com.
We manage our investments to ensure that we will have sufficient liquidity to meet our obligations, taking into
consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as
57
well as the expected cash flows to be generated by our operations. In addition to the interest and dividends we will receive, we
anticipate that between $40 million and $70 million of our investments will mature (or be paid down) each quarter over the
next twelve months and become available, if needed, to meet our cash flow requirements. The primary outflow of cash at our
insurance subsidiaries is related to paid losses and operating costs, including income taxes. The payment of individual claims
cannot be predicted with certainty; therefore, we rely upon the history of paid claims in estimating the timing of future claims
payments. To the extent that we may have an unanticipated shortfall in cash, we may either liquidate securities or borrow funds
under existing borrowing arrangements through our Revolving Credit Agreement and the FHLB system. As of February 16,
2018, $155 million could be made available for use through our Revolving Credit Agreement, as discussed in this section under
the heading "Debt." Given the duration of our investments, we do not foresee a shortfall that would require us to meet operating
cash needs through additional borrowings. Additional information regarding the credit facility is detailed in Note 9 of the Notes
to Consolidated Financial Statements.
As discussed under the heading "Business Combinations and Ventures" and in Note 3 of the Notes to Consolidated
Financial Statements, our fixed maturity and short-term investments include securities deposited with Lloyd's in order to meet
our FAL requirement. At December 31, 2017, securities on deposit with Lloyd's included fixed maturities having a fair value of
$123.5 million and short-term investments with a fair value of $0.4 million.
Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately
93% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average
effective duration of our fixed maturity securities at December 31, 2017 was 3.43 years; the weighted average effective
duration of our fixed maturity securities combined with our short-term securities was 2.9 years.
The carrying value and unfunded commitments for certain of our investments were as follows:
($ in thousands, except expected funding period)
2017
2016
Unfunded
Commitment
Expected funding
period in years
Carrying Value
2017
Qualified affordable housing project tax credit
partnerships (1)
Historic tax credit partnerships (2)
Investment fund LPs/LLCs (2)
Total
$
$
84,607 $
6,118
294,924
385,649 $
102,313
$
11,459
273,986
387,758
$
1,208
3,004
160,428
164,640
6
2
6
(1) The carrying value reflects our total commitments (both funded and unfunded) to the partnerships, less any amortization, since our
initial investment. We fund these investments based on funding schedules maintained by the partnerships.
(2) The carrying value reflects our funded commitments less any amortization.
Investment fund LPs/LLCs are by nature less liquid and may involve more risk than other investments. We manage our
risk through diversification of asset class and geographic location. At December 31, 2017, we had investments in 30 separate
investment funds with a total carrying value of $294.9 million, as shown in the table above, which represented 8% of our Total
Investments. We review and monitor the performance of these investments on a quarterly basis.
Business Combinations and Ventures
There were no business combinations during the years ended December 31, 2017, 2016 and 2015.
In the fourth quarter of 2017, we provided 100% of the capital for the newly formed SPA, Syndicate 6131, which began
active operations effective January 1, 2018. The capital for Syndicate 6131 was provided through an increase in our FAL
securities, which at December 31, 2017 had a fair value of approximately $123.9 million, as discussed in Note 3 of the Notes to
Consolidated Financial Statements. We have a total capital commitment to support our Lloyd's Syndicate operations through
2022 of up to $200 million. See further discussion in our Segment Operating Results - Lloyd's Syndicate section that follows.
58
Financing Activities and Related Cash Flows
Treasury Shares
Treasury share activity for 2017, 2016 and 2015 was as follows:
Treasury shares at the beginning of the period
(In thousands)
Shares reacquired, at cost of $2 million and $170 million for 2016 and 2015,
respectively
Shares reissued, primarily those reissued pursuant to the ProAssurance 2011
Employee Stock Ownership Plan, fair value of approximately $2 million in each
period presented
Treasury shares at the end of the period
2017
2016
2015
9,409
9,403
5,763
—
44
3,680
(41)
9,368
(38)
9,409
(40)
9,403
We did not repurchase any common shares subsequent to December 31, 2017 and as of February 16, 2018 our remaining
Board authorization was approximately $110 million.
Shareholder Dividends
Our Board declared cash dividends during 2017, 2016 and 2015 as follows:
Quarterly Cash Dividends Declared, per Share
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fourth Quarter - Special dividend
2017
2016
2015
$
$
$
$
$
0.31
0.31
0.31
0.31
4.69
$
$
$
$
$
0.31
0.31
0.31
0.31
4.69
$
$
$
$
$
0.31
0.31
0.31
0.31
1.00
Each dividend was paid in the month following the quarter in which it was declared. Cash dividends totaling $315
million, $119 million and $218 million were paid during the years ended December 31, 2017, 2016 and 2015, respectively. Any
decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of financial
performance, future expectations and other factors deemed relevant by the Board.
Debt
At December 31, 2017, our debt included $250 million of outstanding unsecured senior notes. The notes bear interest at
5.3% annually and are due in 2023 although they may be redeemed in whole or part prior to maturity. There are no financial
covenants associated with these notes.
We have a Revolving Credit Agreement which may be used for general corporate purposes, including, but not limited to,
short-term working capital, share repurchases as authorized by the Board and support for other activities. Our Revolving Credit
Agreement permits borrowings of up to $200 million, and has available a $50 million accordion feature, which, if successfully
subscribed, would expand permitted borrowings up to $250 million. During 2017, we repaid $77 million of the balance
outstanding on the Revolving Credit Agreement, and at December 31, 2017, we had outstanding borrowings of $123 million,
on a fully secured basis. In January and February of 2018, we repaid $28 million of the balance outstanding on the Revolving
Credit Agreement, and the remaining outstanding borrowing is repayable or renewable in the first quarter of 2018. Repayment
can be deferred until expiration of the Revolving Credit Agreement in June 2020. We are in compliance with the financial
covenants of the Revolving Credit Agreement.
During the fourth quarter of 2017, two of our subsidiaries each entered into ten-year mortgage loans collectively totaling
approximately $40 million (Mortgage Loans) with one lender in connection with the recapitalization of two office buildings.
The Mortgage Loans mature in December 2027 and accrue interest at three-month LIBOR plus 132.5 basis points with
principal and interest payable on a quarterly basis. We are in compliance with the financial covenant of the Mortgage Loans.
Additional information regarding our debt is provided in Note 9 of the Notes to Consolidated Financial Statements.
During the fourth quarter of 2017, we entered into an interest rate cap agreement with a notional amount of $35 million to
manage our exposure to increases in LIBOR on our Mortgage Loans. Per the interest rate cap agreement, we are entitled to
receive cash payments if and when the three-month LIBOR exceeds 235 basis points. Additional information on our interest
rate cap agreement is provided in Note 10 of the Notes to Consolidated Financial Statements.
59
Two of our insurance subsidiaries are members of an FHLB. Through membership, those subsidiaries have access to
secured cash advances which can be used for liquidity purposes or other operational needs. In order for us to use FHLB
proceeds, regulatory approvals may be required depending on the nature of the transaction. To date, those subsidiaries have not
materially utilized their membership for borrowing purposes.
Off-Balance Sheet Arrangements/Guarantees
We have no significant off-balance sheet arrangements/guarantees.
Contractual Obligations
We believe that our operating cash flow and funds from our investment portfolio are adequate to meet our contractual
obligations.
A schedule of our non-cancellable contractual obligations at December 31, 2017 was as follows:
(In thousands)
Total
Losses and loss adjustment expenses
$ 2,048,381
$
Debt obligations including interest and fees
Operating lease obligations
507,014
28,401
Payments due by period
Less than
1 year
553,033
18,285
5,021
1-3 years
3-5 years
$
766,605
$
364,215
$
158,364
8,285
31,680
5,883
More than
5 years
364,528
298,685
9,212
Funding commitments primarily related to non-
public investment entities
172,749
88,609
70,728
13,252
160
Total
$ 2,756,545
$
664,948
$ 1,003,982
$
415,030
$
672,585
The anticipated payout of Losses and loss adjustment expenses is based upon our historical payout patterns. Both the
timing and amount of these payments may vary from the payments indicated.
The above table presumes the current outstanding borrowings under our Revolving Credit Agreement at December 31,
2017 will remain outstanding through expiration of the agreement and accrue interest at the respective current interest rates at
December 31, 2017. Therefore, we have also included unused commitment fees associated with our Revolving Credit
Agreement as we presume the unused portion of the credit line at December 31, 2017 will remain available through expiration
of the agreement. Additionally, we presume the current interest rate on our Mortgage Loans at December 31, 2017 will remain
constant until maturity of the Mortgage Loans. For more information regarding these agreements see Note 9 of the Notes to
Consolidated Financial Statements.
Our operating lease obligations are primarily for the rental of office space and office equipment. Our funding
commitments are primarily related to non-public investment entities but also include the unused commitments under our
Syndicate Credit Agreement. For more information regarding these agreements see Note 8 of the Notes to Consolidated
Financial Statements.
The above table excludes our remaining capital commitment of $76 million at December 31, 2017 to support our
underwriting capacity in our Lloyd's Syndicates through 2022 of up to $200 million, referred to as FAL. In order to satisfy the
FAL requirement, we transfer funds from our Corporate segment to our Lloyd's Syndicate segment which are used to invest in
securities that are placed on deposit with Lloyd's. See further discussion of the securities on deposit with Lloyd's in Note 3 of
the Notes to Consolidated Financial Statements.
60
Results of Operations - Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Selected consolidated financial data for each period is summarized in the table below.
($ in thousands, except per share data)
2017
2016
Change
Year Ended December 31
Revenues:
Net premiums written
Net premiums earned
Net investment result
Net realized investment gains (losses)
Other income
Total revenues
Expenses:
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Segregated portfolio cells dividend expense (income)
Interest expense
Total expenses
Income before income taxes
Income tax expense (benefit)
Net income
$ 764,018
$ 738,533
$ 25,485
$ 738,531
$ 733,281
$
5,250
103,695
16,409
7,514
866,149
469,158
235,753
15,771
16,844
737,526
94,250
34,875
7,808
870,214
443,229
227,610
8,142
15,032
694,013
9,445
(18,466)
(294)
(4,065)
25,929
8,143
7,629
1,812
43,513
128,623
176,201
(47,578)
21,359
25,120
(3,761)
$ 107,264
$ 151,081
$ (43,817)
Non-GAAP operating income
$ 108,538
$ 129,844
$ (21,306)
Earnings per share:
Basic
Diluted
Non-GAAP operating earnings per share:
Basic
Diluted
Net loss ratio
Underwriting expense ratio
Combined ratio
Operating ratio
Effective tax rate
Return on equity
$
$
$
$
$
$
$
$
2.01
2.00
2.03
2.02
63.5%
31.9%
95.4%
82.4%
16.6%
6.3%
2.84
2.83
2.44
2.43
60.4%
31.0%
91.4%
77.8%
14.3%
8.0%
$
$
$
$
(0.83)
(0.83)
(0.41)
(0.41)
3.1 pts
0.9 pts
4.0 pts
4.6 pts
2.3 pts
(1.7) pts
In all tables that follow, the abbreviation "nm" indicates that the information or the percentage change is not meaningful.
61
Executive Summary of Operations
The following sections provide an overview of our consolidated and segment results of operations for the year ended
December 31, 2017 as compared to 2016. See the Segment Operating Results sections that follow for additional information
regarding each segment's operating results.
Revenues
Our consolidated and segment net premiums earned were as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Net Premiums Earned
Specialty P&C
$ 453,921
$ 457,816
Workers' Compensation
227,408
220,815
$ (3,895)
6,593
Lloyd's Syndicate
57,202
54,650
Consolidated total
$ 738,531
$ 733,281
$
2,552
5,250
(0.9%)
3.0%
4.7%
0.7%
Consolidated net premiums earned increased in 2017 as compared to 2016. The decrease in net premiums earned in our
Specialty P&C segment was due to the effect of a prior year novation which resulted in $11.8 million in premium earned in
2016 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). After
removing the impact of the prior year novation in the Specialty P&C segment, net premiums earned increased in all our
operating segments in 2017 as compared to 2016.
The following table shows our consolidated net investment result:
Net investment income
($ in thousands)
2017
$ 95,662
Equity in earnings (loss) of unconsolidated subsidiaries
8,033
Net investment result
$ 103,695
Year Ended December 31
2016
Change
$ 100,012
(5,762)
$ 94,250
$ (4,350)
13,795
$
9,445
(4.3%)
239.4%
10.0%
The increase in our consolidated net investment result in 2017 was primarily attributable to an increase in earnings from
our unconsolidated subsidiaries of $13.8 million due to higher reported earnings from our investments in LP/LLCs and the
effect of a smaller increase in the estimate of partnership operating losses related to our tax credit partnerships in 2017 as
compared to 2016. The increase was partially offset by a decrease in net investment income primarily attributable to reduced
earnings from our fixed income portfolio, which reflected both lower yields and lower average investment income balances.
The following table shows our total consolidated net realized investment gains (losses):
Year Ended December 31
($ in thousands)
Net impairment losses recognized in earnings
Other net realized investment gains (losses)
Net realized investment gains (losses)
2017
2016
$ (12,952) $ (9,766) $ (3,186)
(15,280)
44,641
$ (18,466)
$ 16,409
$ 34,875
29,361
Change
(32.6%)
(34.2%)
(52.9%)
During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early
stage business investment. See further discussion in our Segment Operating Results - Corporate section that follows. Other net
realized investment gains during 2017 was primarily composed of changes in unrealized holding gains and net realized
investment gains related to our trading portfolio.
62
Expenses
The following table shows our consolidated and segment net loss ratios:
($ in millions)
2017
2016
Change
Year Ended December 31
Current accident year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Calendar year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Favorable net loss development, prior
accident years
Consolidated
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
81.7%
89.9%
66.2%
78.7%
63.5%
63.6%
59.9%
77.3%
80.1%
88.6%
66.4%
63.3%
60.4%
58.7%
63.6%
62.4%
1.6 pts
1.3 pts
(0.2) pts
15.4 pts
3.1 pts
4.9 pts
(3.7) pts
14.9 pts
$ 134.4
$ 119.3
$
$
14.3
0.8
$ 143.8
$ 137.2
$
$
6.1
0.5
$
$
$
$
(9.4)
(17.9)
8.2
0.3
Our consolidated current accident year net loss ratio increased 1.6 percentage points for the year ended December 31,
2017 as compared to 2016 primarily driven by higher current accident year net loss ratios in our Lloyd's Syndicate and
Specialty P&C segments. The higher current accident year net loss ratio in our Lloyd's Syndicate segment was primarily due to
losses related to Hurricanes Harvey, Irma and Maria during 2017 which resulted in a 0.9 percentage point increase in our
consolidated current accident year net loss ratio (see further discussion in the Segment Operating Results - Lloyd's Syndicate
section that follows).
In both 2017 and 2016, our consolidated calendar year net loss ratio was lower than our consolidated current accident
year net loss ratio due to the recognition of favorable net loss development for prior accident years, as shown in the previous
table.
Our consolidated and segment underwriting expense ratios were as follows:
Underwriting Expense Ratio
Consolidated
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Corporate*
Year Ended December 31
2017
2016
Change
31.9%
24.0%
31.2%
47.1%
4.0%
31.0%
22.8%
31.9%
41.8%
4.2%
0.9 pts
1.2 pts
(0.7) pts
5.3 pts
(0.2) pts
*There are no net premiums earned associated with the Corporate segment. Ratios shown are the contribution of the
Corporate segment to the consolidated ratio (Corporate operating expenses divided by consolidated net premium earned).
Our consolidated underwriting expense ratio increased 0.9 percentage points for the year ended December 31, 2017 as
compared to 2016 primarily due to the increase in DPAC amortization relative to consolidated net premiums earned. Although
consolidated net premiums earned increased in 2017, the increase was largely reduced by the effect of a prior year novation in
our Specialty P&C segment, as previously discussed, which resulted in a 0.5 percentage point increase in the consolidated
underwriting expense ratio. After removing the impact of the prior year novation, the remaining increase in the consolidated
underwriting expense ratio was driven by an increase in DPAC amortization, particularly in our Specialty P&C segment, as a
result of an increase in commission expense and a decrease in ceding commission income, which is an offset to expense.
63
Taxes
Our effective tax rate was 16.6% for the year ended December 31, 2017, as compared to our 2016 effective tax rate of
14.3%. The increase in the effective tax rate in 2017 was primarily due to the impact to our deferred tax balances at December
31, 2017 as a result of the enactment of the TCJA, which increased the rate by 7.8%, somewhat offset by the application of new
guidance adopted in the first quarter of 2017 related to the improvement in accounting for share-based payments, which
reduced the rate by 2.1%. Excluding those impacts, our effective tax rate would have been 10.9% for 2017 (see further
discussion under the heading "Taxes" within our Segment Operating Results - Corporate section that follows).
Operating Ratio and Return on Equity
Our operating ratio (calculated as our combined ratio, less our investment income ratio) increased by 4.6 percentage
points in the year ended December 31, 2017 as compared to 2016. The increase reflected a higher consolidated net loss ratio
driven by a lower amount of prior year favorable development in our Specialty P&C segment and estimated losses recognized
during 2017 related to Hurricanes Harvey, Irma and Maria in our Lloyd's Syndicate segment (see further discussion in the
Segment Operating Results - Lloyd's Syndicate section that follows).
ROE was 6.3% for the year ended December 31, 2017 as compared to 8.0% for the same respective period of 2016. The
decrease in 2017 was primarily due to a decrease in net income, partially offset by a lower average equity base (the
denominator of the ROE ratio) as compared to 2016. The lower average equity base in 2017 as compared to 2016 was primarily
due to dividends declared during the year ended December 31, 2017.
Book Value per Share
We believe the payment of dividends is currently our most effective tool for the deployment of excess capital even
though, in the short-term, dividend declarations dampen growth in book value per share. Our book value per share at
December 31, 2017 as compared to December 31, 2016 is shown in the following table.
Book Value Per Share at December 31, 2016
Increase (decrease) to book value per share during the year ended
December 31, 2017 attributable to:
Book Value Per
Share
$
33.78
Dividends declared
Net income
Decrease in AOCI
Other
Book Value Per Share at December 31, 2017
$
(5.93)
2.01
(0.05)
0.02
29.83
64
Non-GAAP Financial Measures
Non-GAAP operating income is a financial measure that is widely used to evaluate performance within the insurance
sector. In calculating Non-GAAP operating income, we have excluded the after-tax effects of the items listed in the following
table that do not reflect normal operating results. We believe Non-GAAP operating income presents a useful view of the
performance of our insurance operations, however it should be considered in conjunction with net income computed in
accordance with GAAP.
The following table is a reconciliation of net income to Non-GAAP operating income:
Net income
(In thousands, except per share data)
Items excluded in the calculation of Non-GAAP operating income:
Year Ended December 31
2017
2016
$
107,264
$
151,081
Net realized investment (gains) losses
(16,409)
(34,875)
Net realized gains (losses) attributable to SPCs which no profit/loss is
retained (1)
Guaranty fund assessments (recoupments)
Pre-tax effect of exclusions
Tax effect, at 35% (2)
After-tax effect of exclusions
Non-GAAP operating income, before tax reform adjustments
Tax reform adjustments on our deferred tax balances excluded in the
calculation of Non-GAAP operating income:
Adjustment of deferred taxes upon the change in corporate tax rate (3)
Adjustment of deferred taxes upon the change in limitation of future
deductibility of certain executive compensation (3)
Non-GAAP operating income
Per diluted common share:
Net income
Effect of exclusions
Non-GAAP operating income per diluted common share
3,083
(157)
(13,483)
4,719
(8,764)
98,500
6,541
3,497
2,049
153
(32,673)
11,436
(21,237)
129,844
—
—
$
$
$
108,538
$
129,844
2.00
0.02
2.02
$
$
2.83
(0.40)
2.43
(1) Net realized investment gains (losses) on investments related to our SPCs are recognized in the earnings of our
Corporate segment and the portion of earnings related to the gain or loss, net of our participation, is distributed back to
the cells through our SPC dividend expense (income). To be consistent with our exclusion of net realized investment
gains (losses) recognized in earnings, we are excluding the portion of net realized investment gains (losses) that is
included in SPC dividend expense (income).
(2) The 35% rate above is the annual expected incremental tax rate associated with the taxable or tax deductible items
listed. The effective tax rate for the respective years was applied to these items in calculating net income. See previous
discussion in this section under the heading "Taxes."
(3) Due to tax reform enacted by the TCJA, we remeasured our deferred tax assets and liabilities based on the newly
enacted tax rate of 21% and recognized a charge of $6.5 million, which is included as a component of income tax
expense from continuing operations for the year ended December 31, 2017. In addition, we have made a reasonable
estimate of the effects on our deferred tax asset balances at December 31, 2017 as it relates to the limitation on the
future deductibility on certain executive compensation and recorded a provisional charge to income tax expense of $3.5
million for the year ended December 31, 2017. Any future guidance from the IRS addressing the effects of the TCJA on
executive compensation could result in a change to this provisional amount. See further discussion under the heading
"Deferred Taxes" in the Critical Accounting Estimates section.
65
Segment Operating Results - Specialty Property & Casualty
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance as
discussed in Note 15 of the Notes to Consolidated Financial Statements. Our Specialty P&C segment operating results reflect
pre-tax underwriting profit or loss from these insurance lines, exclusive of investment results, which are included in our
Corporate segment. Segment operating results included the following:
($ in thousands)
Net premiums written
Net premiums earned
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and
operating expenses
Segregated portfolio cells dividend
(expense) income
Segment operating results
Year Ended December 31
$
$
2017
470,535
453,921
5,688
(288,701)
2016
458,681
457,816
5,306
(268,579)
$
$
Change
11,854
2.6%
(3,895)
382
(20,122)
(0.9%)
7.2%
7.5%
(108,830)
(104,333)
(4,497)
4.3%
(4,970)
57,108
$
(144)
90,066
$
(4,826)
(32,958)
3,351.4%
(36.6%)
$
$
$
Net loss ratio
Underwriting expense ratio
63.6%
24.0%
58.7%
22.8%
4.9 pts
1.2 pts
Premiums Written
Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of
new business, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by
rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written
through multi-period policies. In addition, premium volume may periodically be affected by shifts in the timing of renewals
between periods. The healthcare professional liability market, which accounts for a majority of the revenues in this segment,
remains challenging as physicians continue joining hospitals or larger group practices and are thus no longer purchasing
individual or group policies in the standard market. In addition, some competitors have chosen to compete primarily on price;
both factors impact our ability to write new business and retain existing business.
Gross, ceded and net premiums written were as follows:
($ in thousands)
Gross premiums written
Less: Ceded premiums written
Net premiums written
Year Ended December 31
2017
$ 549,323
78,788
$ 470,535
2016
$ 535,725
77,044
$ 458,681
Change
$ 13,598
1,744
$ 11,854
2.5%
2.3%
2.6%
66
Gross Premiums Written
Gross premiums written by component were as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Professional liability
Physicians (1)(7)
Twelve month term
Twenty-four month term
Total Physicians
Healthcare facilities (2)(7)
Other healthcare providers (3)
Legal professionals (4)
Tail coverages (5)
Total professional liability
Medical technology liability (6)
Other
Total
$ 360,232
$ 344,150
$ 16,082
27,370
387,602
47,697
32,599
25,628
21,206
514,732
34,164
21,869
366,019
59,361
33,353
25,351
18,092
502,176
33,067
427
$ 549,323
482
$ 535,725
5,501
21,583
(11,664)
(754)
277
3,114
12,556
1,097
(55)
$ 13,598
4.7%
25.2%
5.9%
(19.6%)
(2.3%)
1.1%
17.2%
2.5%
3.3%
(11.4%)
2.5%
(1) Physician policies were our greatest source of premium revenues in both 2017 and 2016. The increase in twelve month
term policies in 2017 was primarily driven by new business written, including the addition of several large policies, and
timing differences related to the renewal of certain policies, largely offset by retention losses. In addition, written
premium reflected an increase in renewal pricing, driven by an increase in exposures for a few large policies. We offer
twenty-four month term policies to our physician insureds in one selected jurisdiction. The increase in twenty-four
month premium, as compared to 2016, primarily reflected the normal cycle of renewals (policies subject to renewal in
2017 were previously written in 2015 rather than in 2016).
(2) Our healthcare facilities premium (which includes hospitals, surgery centers and other facilities) declined in 2017 as
compared to 2016 driven by the effect of a novation agreement entered into during the fourth quarter of 2016. A novation
represents a legal replacement of one insurer by another extinguishing the ceding entity's liability to the policyholder.
The novation resulted in approximately $11.8 million of one-time gross premiums written and earned during the fourth
quarter of 2016 as all the underlying loss events covered by the policy occurred in the past. After removing the impact of
the novation, our healthcare facilities premium was relatively flat compared to 2016 due to several offsetting factors.
While an increase in renewal pricing and new business written, including one large policy, increased written premium in
2017, the impact was offset by a timing difference related to the renewal of one large policy and retention losses during
the period. Renewal pricing increased during 2017 due to changes in loss experience related to a few large policies.
(3) Our other healthcare providers are primarily dentists, chiropractors and allied health professionals.
(4) Our legal professionals policies are primarily individual and small group policies in select areas of practice. The increase
in 2017 as compared to 2016 was primarily due to new business written and, to a lesser extent, an increase in the rate
charged for certain renewed policies, largely offset by retention losses. Retention losses were primarily driven by
competitive market conditions.
(5) We offer extended reporting endorsement or "tail" coverage to insureds who discontinue their claims-made coverage
with us, and we also periodically offer tail coverage through custom policies. The amount of tail coverage premium
written can vary widely from period to period. The increase in 2017 as compared to 2016 was driven by the purchase of
tail coverage for a few large claims-made policies in one jurisdiction that were rewritten to occurrence coverage in 2017.
These policies are part of one of our shared risk arrangements and therefore, a large portion of the premium written was
ceded during the current period (see further discussion in the Ceded Premiums Written section that follows).
(6) Our medical technology liability business is marketed throughout the U.S.; coverage is offered on a primary basis,
within specified limits, to manufacturers and distributors of medical technology and life sciences products including
entities conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our
medical technology liability premium volume is impacted by the sales volume of insureds. The increase in 2017
primarily reflected new business written, including two large policies during the fourth quarter of 2017, partially offset
by retention losses, including the loss of one large policy in the first quarter of 2017. Retention losses in 2017 are largely
attributable to price competition and merger activity within the industry.
67
(7) During 2016, we expanded our alternative market solutions by writing new healthcare premium in certain SPCs at
Eastern Re. We wrote approximately $1.2 million of healthcare professional liability premium in our physicians line of
business in each of the years ended December 31, 2017 and 2016. We wrote healthcare professional liability premium in
our healthcare facilities line of business of approximately $3.1 million and $2.9 million for the years ended
December 31, 2017 and 2016, respectively. All or a portion of the premium written was ceded to the SPCs at our wholly
owned Cayman Islands reinsurance subsidiary, Eastern Re. Under the SPC structure, the operating results of each cell,
net of any participation we have taken in the SPCs, accrue to the benefit of the external owners of that cell. Our
Specialty P&C segment does not currently participate in the cells that write HCPL premium, and therefore retains no
underwriting profit or loss. Additional information regarding the SPCs is included under the heading "Underwriting,
Policy Acquisition and Operating Expense" in the section that follows.
New business written by component on a direct basis was as follows:
(In millions)
2017
2016
Year Ended December 31
Physicians
Healthcare facilities
Other healthcare providers
Legal professionals
Medical technology liability
Total
$
31.6
$
5.8
2.1
3.6
5.4
32.8
17.4
3.4
3.8
5.1
$
48.5
$
62.5
For our Specialty P&C segment, we calculate our retention rate as annualized renewed premium divided by all
annualized premium subject to renewal. Retention rates are affected by a number of factors. We may lose insureds to
competitors or to alternative insurance mechanisms such as risk retention groups or self-insurance entities (often when
physicians join hospitals or large group practices) or due to pricing or other issues. We may choose not to renew an insured as a
result of our underwriting evaluation. Insureds may also terminate coverage because they have left the practice of medicine for
various reasons, principally for retirement, death or disability, but also for personal reasons.
Retention by component was as follows:
Year Ended December 31
2017
2016
Physicians*
Healthcare facilities*
Other healthcare providers*
Legal professionals
90%
86%
85%
84%
Medical technology liability
* Excludes certain policies written on an excess and surplus lines basis.
87%
88%
79%
85%
78%
85%
The pricing of our business includes the effects of filed rates, surcharges and discounts. Renewal pricing also reflects
changes in our exposure base, deductibles, self-insurance retention limits and other policy items. We continue to base our
pricing on expected losses, as indicated by our historical loss data and available industry loss data. We are committed to a rate
structure that will allow us to fulfill our obligations to our insureds, while generating competitive returns for our shareholders.
68
Changes in renewal pricing by component was as follows:
Year Ended
December 31
2017
Physicians (1)
Healthcare facilities (1)(2)
Other healthcare providers (1)
Legal professionals (2)
Medical technology liability
(1) Excludes certain policies written on an excess and surplus lines basis.
(2) See Gross Premiums Written section for further explanation of renewal pricing
1%
3%
8%
1%
2%
increase.
Ceded Premiums Written
Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. Through
our current excess of loss reinsurance arrangements we generally retain the first $1 million in risk insured by us and cede
coverages in excess of this amount. For our medical technology liability coverages, we also retain 10% of the next $9 million
of risk for coverages in excess of $1 million. We pay our reinsurers a ceding premium in exchange for their accepting the risk,
the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and
maximum amounts.
Ceded premiums written were as follows:
($ in thousands)
Excess of loss reinsurance arrangements (1)
Premium ceded to Syndicate 1729 (2)
Other shared risk arrangements (3)
Other ceded premiums written
Adjustment to premiums owed under reinsurance agreements, prior
accident years, net (4)
Total ceded premiums written
Year Ended December 31
2017
$ 31,853
2016
$ 30,037
13,983
30,780
3,361
23,832
26,737
3,521
Change
$ 1,816
(9,849)
4,043
(160)
6.0%
(41.3%)
15.1%
(4.5%)
(1,189)
$ 78,788
(7,083)
$ 77,044
5,894
(83.2%)
$ 1,744
2.3%
(1) We generally reinsure risks under our excess of loss reinsurance arrangements pursuant to which the reinsurers
agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the
maximum individual limits offered. In the majority of our excess of loss reinsurance arrangements, the premium
due to the reinsurer is determined by the loss experience of that business reinsured, subject to certain minimum and
maximum amounts. The increase in ceded premiums written under our excess of loss reinsurance arrangements for
2017 was primarily due to revised contract terms on our medical technology liability reinsurance arrangement
effective January 1, 2017, which reduced the amount of excess premium we retain from 20% to 10%.
(2) As previously discussed, we are the majority participant in Syndicate 1729 and normally record our pro rata share
of its operating results in our Lloyd's Syndicate segment on a quarter delay, except when information is available
that is material to the current period. We also record the cession to the Lloyd's Syndicate segment from our
Specialty P&C segment on a quarter delay as the amounts are not material and this permits the cession to be
reported by both the Lloyd's Syndicate segment and the Specialty P&C segment in the same reporting period. The
decrease in ceded premiums to Syndicate 1729 for the year ended December 31, 2017 reflected the revised contract
terms effective January 1, 2017 which reduced the premiums ceded by essentially half. We did not renew our quota
share agreement with Syndicate 1729 on January 1, 2018, however the impact will not be reflected in ceded
premiums until the second quarter of 2018 due to the previously mentioned quarter delay. See Lloyd's Syndicate
segment results for further discussion on the quota share agreement. As our premiums are earned, we recognize the
related ceding commission income which reduces underwriting expense by offsetting DPAC amortization. For the
years ended December 31, 2017 and 2016, the related ceding commission income was approximately 27% of
ceded premiums written. For our consolidated results, eliminations of the inter-segment portion (58% of the
Specialty P&C cession) of the transactions are also recorded on a quarter delay.
69
(3) We have entered into various shared risk arrangements, including quota share, fronting, and captive arrangements,
with certain large healthcare systems and other insurance entities. These arrangements include our Ascension
Health and CAPAssurance programs. While we cede a large portion of the premium written under these
arrangements, they provide us an opportunity to grow net premium through strategic partnerships. The increase in
2017 was primarily driven by a few large tail endorsements that were written, and substantially ceded, related to
one of these shared risk arrangements, as previously discussed. The remaining increase was due to growth in our
Ascension Health and CAPAssurance programs.
(4) Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable
under a reinsurance arrangement are known. As a part of the process of estimating our loss reserve we also make
estimates regarding the amounts recoverable under our reinsurance arrangements. As previously discussed, the
premiums ultimately ceded under certain of our excess of loss reinsurance arrangements are subject to the losses
ceded under the arrangements. Based upon adjustments in 2017 and 2016 to our estimate of expected losses and
associated recoveries for prior year ceded losses, we reduced our estimate of ceded premiums owed to reinsurers.
However, prior accident year ceded premium reductions were lower in 2017 as compared to 2016. In addition, the
lower prior accident year ceded premium reduction in 2017 reflected an overall change in expected loss recoveries
attributable to one large claim during the second quarter of 2017. We do not believe this isolated claim indicates a
change in overall loss trends for us or the industry. Changes to estimates of premiums ceded related to prior
accident years are fully earned in the period the changes in estimates occur.
Ceded Premiums Ratio
As shown in the table below, our ceded premiums ratio was affected in both 2017 and 2016 by revisions to our estimate of
premiums owed to reinsurers related to coverages provided in prior accident years.
Ceded premiums ratio, as reported
Less the effect of adjustments in premiums owed under reinsurance
agreements, prior accident years (as previously discussed)
Ratio, current accident year
Year Ended December 31
2017
14.3% 14.4%
2016
Change
(0.1) pts
(0.2%)
(1.3%)
14.5% 15.7%
1.1 pts
(1.2) pts
The decline in the current accident year ceded premiums ratio for the year ended December 31, 2017 was primarily
attributable to a decrease in premium ceded to Syndicate 1729, partially offset by an increase in premium ceded under our other
shared risk and excess of loss reinsurance arrangements (see discussion under the heading "Ceded Premiums Written").
Net Premiums Earned
Net premiums earned were as follows:
Year Ended December 31
($ in thousands)
Gross premiums earned
2017
$ 537,583
2016
$ 535,931
Less: Ceded premiums earned
83,662
78,115
Net premiums earned
$ 453,921
$ 457,816
Change
$
1,652
5,547
$ (3,895)
0.3%
7.1%
(0.9%)
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our
reinsurers for their assumption of a portion of our losses. Because premiums are generally earned pro rata over the entire policy
period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year,
however, as discussed above, we write certain policies with a twenty-four month term, and a few of our medical technology
liability policies have a multi-year term. Tail coverage premiums are generally 100% earned in the period written because the
policies insure only incidents that occurred in prior periods and are not cancellable. Additionally, ceded premium changes due
to changes to estimates of premiums owed under reinsurance agreements for prior accident years are fully earned in the period
of change.
The increase in gross premiums earned in 2017 primarily reflected the pro rata effect of the higher premiums written
during the preceding twelve months, primarily in our healthcare facilities line of business, and a few large tail policies written
and earned during 2017. This increase was largely offset by the effect of a large novation written and earned during the fourth
quarter of 2016, as discussed above under the heading "Gross Premiums Written." In addition, prior accident year ceded
70
premiums reductions were $5.9 million lower in 2017 than in 2016 (see discussion under the heading "Ceded Premiums
Written").
Losses and Loss Adjustment Expenses
The determination of calendar year losses involves the actuarial evaluation of incurred losses for the current accident year
and the actuarial re-evaluation of incurred losses for prior accident years, including an evaluation of the reserve amounts
required for losses in excess of policy limits.
Accident year refers to the accounting period in which the insured event becomes a liability of the insurer. For claims-
made policies, which represent over 90% of the premiums written in our Specialty P&C segment, the insured event generally
becomes a liability when the event is first reported to us. For occurrence policies the insured event becomes a liability when the
event takes place. We believe that measuring losses on an accident year basis is the best measure of the underlying profitability
of the premiums earned in that period, since it associates policy premiums earned with the estimate of the losses incurred
related to those policy premiums.
The following table summarizes calendar year net loss ratios by separating losses between the current accident year and
all prior accident years. Additionally, the table shows our current accident year net loss ratio was affected by revisions to our
estimate of premiums owed to reinsurers related to coverages provided in prior accident years. Net loss ratios for 2017 and
2016 compare as follows:
Calendar year net loss ratio
Less impact of prior accident years on the net loss ratio
Current accident year net loss ratio
Less estimated ratio increase (decrease) attributable to:
Ceded premium adjustments, prior accident years (2)
Net Loss Ratios (1)
Year Ended December 31
2017
63.6%
(26.3%)
89.9 %
2016
58.7%
(29.9%)
88.6 %
Change
4.9 pts
3.6 pts
1.3 pts
(0.2%)
(1.4%)
1.2 pts
Current accident year net loss ratio, excluding the effect of prior
year ceded premium (3)
90.1 %
90.0 %
0.1 pts
(1) Net losses, as specified, divided by net premiums earned.
(2) Reductions to premiums owed under reinsurance agreements for prior accident years increased net premiums earned
(the denominator of the current accident year ratio) in both 2017 and 2016, however, the reduction was substantially
less in 2017 than in 2016. See the discussion in the Premiums section for our Specialty P&C segment under the
heading "Ceded Premiums Written" for additional information.
(3) The current accident year net loss ratio was relatively unchanged as compared to 2016 primarily due to offsetting
factors. Changes in the mix of business resulted in an 1.2 percentage point increase in the current accident year net
loss ratio in 2017 as compared to 2016. However, the effect of a DDR reinsurance commutation during the fourth
quarter of 2017 (reduction in current year net losses) partially offset the increase by 0.5 percentage points and the
effect of a prior year novation (net premiums earned at a high loss ratio) partially offset the increase by 0.4
percentage points. Additional information regarding the prior year novation is included in the Premiums section for
our Specialty P&C segment under the heading "Gross Premiums Written."
We recognized net favorable loss development related to our previously established reserve of $119.3 million and $137.2
million for the years ended December 31, 2017 and 2016, respectively. The net favorable loss development in 2017 and 2016
included $10.1 million and $12.0 million, respectively, attributable to our medical technology liability line of business and $5.2
million and $9.4 million, respectively, attributable to our legal professionals liability line of business. We re-evaluate our
previously established reserve each quarter based on our most recently available claims data and currently available industry
trend information. Development recognized during 2017 principally related to accident years 2010 through 2014. Development
recognized during 2016 principally related to accident years 2009 through 2013.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting
Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our
reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are
reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions
can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2017
and 2016.
71
Underwriting, Policy Acquisition and Operating Expenses
Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31,
2017 and 2016 were comprised as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Specialty P&C segment:
DPAC amortization
Management fees
Other underwriting and operating expenses
Total
$
48,469
$
45,019
$ 3,450
6,620
53,741
6,447
52,867
173
874
$ 108,830
$ 104,333
$ 4,497
7.7%
2.7%
1.7%
4.3%
DPAC amortization increased during the year ended December 31, 2017 as compared to 2016 primarily driven by an
increase in commission expense in 2017 and a decrease in ceding commission income, which is an offset to expense, primarily
due to a reduction in premiums ceded to Syndicate 1729. In addition, the increase in DPAC amortization reflected the effect of
higher gross premiums earned in 2017 as compared to 2016.
Management fees are charged pursuant to a management agreement by the Corporate segment to the operating
subsidiaries within our Specialty P&C segment for services provided, based on the extent to which services are provided to the
subsidiary and the amount of premium written by the subsidiary. While the terms of the management agreement were
consistent between 2017 and 2016, fluctuations in the amount of premium written by each subsidiary can result in
corresponding variations in the management fee charged to each subsidiary during a particular period.
Other underwriting and operating expenses increased during the year ended December 31, 2017 as compared to 2016
primarily driven by an increase in compensation related expenses and costs associated with the amortization of new software
placed into service during the first quarter of 2017. The increase was partially offset by the effect of non-recurring costs in
2016, including state assessments and a donation to a scholarship fund for which we received a wholly offsetting tax credit
during 2016.
Underwriting Expense Ratio (the Expense Ratio)
Our expense ratio for the Specialty P&C segment for the year ended December 31, 2017 as compared to 2016, was as
follows:
Underwriting expense ratio
Year Ended December 31
2016
2017
24.0% 22.8%
Change
1.2 pts
The increase in the underwriting expense ratio for 2017 was primarily due to the effect of a reduction in net premiums
earned as compared to 2016, primarily attributable to a prior year novation (see further discussion under the heading "Gross
Premiums Written") and, to a lesser extent, the effect of an increase in DPAC amortization and software amortization in 2017,
as previously discussed.
Segregated Portfolio Cell Dividend Expense (Income)
During 2016 we expanded our alternative market solutions by writing HCPL premium in three SPCs at Eastern Re.
Consistent with the SPC structure discussed in our Workers' Compensation segment section that follows, the net operating
results of each cell, net of any participation we have taken in the SPCs, are due to the external owners of that cell. Our
Specialty P&C segment does not currently participate in the cells that write HCPL premium, and therefore retains no profit or
loss. SPC dividend (expense) income for the years ended December 31, 2017 and 2016 was as follows:
(In thousands)
SPC dividend (expense) income
$
Year Ended December 31
2017
(4,970) $
2016
Change
(144) $
(4,826)
The SPC dividend expense for the year ended December 31, 2017 reflected a $5.2 million pre-tax expense recognized
during the second quarter of 2017 related to previously unrecognized SPC dividend expense for the cumulative earnings of
unrelated parties that have owned SPCs at various times since 2003 within a Bermuda captive insurance operation. Historically,
72
within our HCPL business, we have written a limited number of segregated cell captive programs through this Bermuda captive
arrangement and the use of this facility has declined as the HCPL insurance market has softened. The SPC dividend expense
attributable to those cells was unrelated to the captive operations of our Eastern Re subsidiary. See more information on our
SPCs under the heading "Underwriting, Policy Acquisition and Operating Expense" in the Segment Operating Results -
Workers' Compensation section that follows.
73
Segment Operating Results - Workers' Compensation
Our Workers' Compensation segment provides traditional workers' compensation insurance products and alternative
market solutions for workers' compensation risks to employers generally with 1,000 or fewer employees, as discussed in Note
15 of the Notes to Consolidated Financial Statements. Segment operating results reflect pre-tax underwriting profit or loss,
which includes SPC dividend expense (income). Investment results, which includes the SPC investment results, are included in
our Corporate segment. Segment operating results included the following:
($ in thousands)
Net premiums written
Net premiums earned
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Segregated portfolio cells dividend (expense) income (1)
Segment operating results
Year Ended December 31
2017
238,514
227,408
674
(136,237)
(70,945)
(5,828)
15,072
$
$
$
2016
223,578
220,815
844
(140,534)
(70,464)
(4,762)
5,899
$
$
$
$
$
$
Change
14,936
6.7%
6,593
(170)
4,297
(481)
(1,066)
9,173
3.0%
(20.1%)
(3.1%)
0.7%
22.4%
155.5%
Net loss ratio
Traditional business
Alternative market business
Segment results
Underwriting expense ratio
Traditional business
Alternative market business
Segment results
62.6%
53.0%
59.9%
31.3%
31.1%
31.2%
66.5%
55.7%
63.6%
32.2%
31.0%
31.9%
(3.9) pts
(2.7) pts
(3.7) pts
(0.9) pts
0.1 pts
(0.7) pts
(1) Represents the underwriting (profit) loss attributable to the alternative market business ceded to the SPCs at Eastern Re, net
of our participation.
During the third quarter of 2017, Eastern Alliance Insurance Group completed a renewal rights transaction with Great
Falls Insurance Company (“Great Falls”) for consideration of $4.2 million. Eastern paid $2.85 million at closing, and the
remaining $1.35 million is contingent upon Eastern renewing at least 75% of the acquired renewal book of business. In the
event Eastern renews less than 75% but greater than 50% of the acquired renewal book of business, the contingent
consideration will be reduced on a pro-rated basis. Great Falls is a monoline workers’ compensation insurance company
domiciled in Maine and is licensed to write business in Maine and New Hampshire. Great Falls' direct premium written was
approximately $13.3 million for the year ended December 31, 2016. Eastern has appointed the Great Falls agency partners and
all Great Falls' employees became our employees. The acquisition of the renewal rights will expand Eastern’s operations into
Maine and New Hampshire and ultimately other New England states, providing geographic diversification and the ability to
expand our specialty workers’ compensation products and services in the New England marketplace. The transaction was
accounted for as an asset acquisition and resulted in the recognition of intangible assets totaling $4.3 million, including
transaction-related costs. As of December 31, 2017, a liability has been recognized for the contingent consideration of $1.35
million as we believe it is more likely than not that we will renew at least 75% of the acquired renewal book of business.
74
Premiums Written
Our workers’ compensation premium volume is driven by four primary factors: (1) the amount of new business written,
(2) audit premium, (3) retention of our existing book of business and (4) premium rates charged on our renewal book of
business.
Gross, ceded and net premiums written were as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Gross premiums written
Traditional business*
Alternative market business
Segment results
Less: Ceded premiums written
Traditional business
Alternative market business*
Segment results
Net premiums written
Traditional business
Alternative market business
$ 182,847
$ 172,025
$ 10,822
80,544
263,391
75,915
247,940
4,629
15,451
9,937
14,940
24,877
9,446
14,916
24,362
491
24
515
172,910
65,604
162,579
60,999
10,331
4,605
Segment results
$ 238,514
$ 223,578
$ 14,936
6.3%
6.1%
6.2%
5.2%
0.2%
2.1%
6.4%
7.5%
6.7%
* Traditional gross premiums written and alternative market ceded premiums written are reported net
of alternative market premiums assumed by our traditional business totaling $0.7 million and $0.9
million for the years ended December 31, 2017 and 2016, respectively.
Our traditional workers’ compensation insurance products include guaranteed cost, dividend, deductible, and
retrospectively-rated policies. Our alternative market business is 100% ceded to either the SPCs at our wholly owned Cayman
Islands reinsurance subsidiary, Eastern Re, or to unaffiliated captive insurers. As of December 31, 2017, there were 24 (21
active) SPCs at Eastern Re and 2 active alternative market programs with unaffiliated captive insurers.
Additional information regarding the structure of the SPCs is included under the heading "Underwriting, Policy
Acquisition and Operating Expenses" section that follows.
Gross Premiums Written
Gross premiums written in our traditional and alternative market business for the years ended December 31, 2017 and
2016 are reflected in the table above. Gross premiums written increased in 2017, driven by growth in both our traditional and
alternative market business. Growth in our traditional business was driven by new business written including $4.6 million of
premium related to our Eastern Specialty Risk unit, which writes higher hazard risks, and $3.4 million of premium written
related to the acquisition of Great Falls' book of business. In addition, the increase in gross premiums written in our traditional
business reflected an increase in the retention rate, partially offset by a decrease in renewal pricing and the impact of premium
adjustments written and earned in the period on retrospectively rated policies which decreased written premium by $1.9 million
in 2017, compared to $0.2 million in 2016. Growth in our alternative market business was driven by new business written and
an increase in the retention rate, partially offset by a decrease in renewal pricing. We retained the 23 alternative market
programs up for renewal for the year ended December 31, 2017. During 2017, we added one new alternative market program at
Eastern Re that was a designed consolidation of two unaffiliated captive programs.
75
New business, audit premium, retention and renewal price changes for both the traditional business and the alternative
market business are shown in the table below:
($ in millions)
$
New business
Audit premium (including EBUB) $
Retention rate (1)
Change in renewal pricing (2)
2017
Alternative
Market
Business
9.9
$
Traditional
Business
37.8
2.7
$
1.4
85 %
(3%)
92 %
(4%)
Year Ended December 31
2016
Alternative
Market
Business
Traditional
Business
$
$
22.8
5.2
$
$
10.2
1.1
Segment
Results
$
$
33.0
6.3
Segment
Results
47.7
4.1
$
$
87 %
(3%)
84 %
(1%)
88 %
(1%)
85 %
(1%)
(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium divided by all annualized
expiring premium subject to renewal. Our retention rate can be impacted by various factors, including price or other
competitive issues, insureds being acquired, or a decision not to renew based on our underwriting evaluation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and the effects of current market
conditions. We continue to base our pricing on expected losses, as indicated by our historical loss data. The renewal rate
decreases reflected the competitive workers' compensation environment.
Ceded Premiums Written
Ceded premiums written reflected our external reinsurance programs and alternative market business ceded to unaffiliated
captive insurance companies.
Ceded premiums written were as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Premiums ceded to external reinsurers
Traditional business
Alternative market business
Segment results
Change in return premium estimate under external
reinsurance
Traditional business
Alternative market business
Segment results
Premiums ceded to unaffiliated captive insurers
Traditional business
Alternative market business
Segment results
Total ceded premiums written
Traditional business
Alternative market business
Segment results
$
9,823 $
8,156
17,979
10,255 $
7,258
17,513
(432)
898
466
(4.2%)
12.4%
2.7%
114
—
114
—
6,784
6,784
(809)
—
(809)
923
—
923
114.1%
nm
114.1%
—
7,658
7,658
—
(874)
(874)
nm
(11.4%)
(11.4%)
9,937
9,446
14,940
24,877 $
14,916
24,362 $
$
491
24
515
5.2%
0.2%
2.1%
We retain the first $0.5 million in risk insured by us on our traditional business and cede losses in excess of this amount
on each loss occurrence under our primary external reinsurance contract. The traditional external reinsurance contract contains
a return premium provision under which we estimate return premium based on the underlying loss experience of policies
covered under the contract. In our alternative market business, the risk retention for each loss occurrence ranges from $0.3
million to $0.35 million based on the alternative market program. We cede 100% of premiums written under two alternative
market programs to unaffiliated captive insurers.
Per our reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis,
whereas alternative market premiums are ceded on a written premium basis. Premiums ceded to external reinsurers in our
76
traditional business decreased during the year ended December 31, 2017 which primarily reflected an increase in revenue
sharing with our reinsurance broker, partially offset by an increase in premiums earned and reinsurance rates. The increase in
premiums ceded to external reinsurers in our alternative market business primarily reflected an increase in premiums written in
certain programs, and the reinsurance rates vary based on the alternative market program.
Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended
December 31, 2017 and 2016. The decrease in the return premium estimate for the year ended December 31, 2017 primarily
reflected severity-related claims activity during the fourth quarter of 2017.
The decrease in premiums ceded to unaffiliated captive insurers reflected the consolidation of the two programs into the
new alternative market program at Eastern Re, as discussed above under the heading "Gross Premiums Written."
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Year Ended December 31
2017
Alternative
Market
Business
Traditional
Business
Segment
Results
Traditional
Business
2016
Alternative
Market
Business
Segment
Results
Ceded premiums ratio, as reported
5.4%
18.5%
9.4%
5.5%
19.6%
9.8%
Less the effect of:
Return premium estimated under external
reinsurance
Premiums ceded to unaffiliated captive insurers
(100%)
Ceded premiums ratio, less the effects of above
0.1%
—%
—%
(0.5%)
—%
(0.3%)
—%
5.3%
7.5%
11.0%
2.4%
7.0%
—%
6.0%
9.0%
10.6%
2.9%
7.2%
As discussed above, we cede premiums related to our traditional business on an earned premium basis, whereas
alternative market premiums are ceded on a written premium basis. The decrease in the traditional ceded premiums ratio
reflected the impact of the revenue sharing noted above, partially offset by the increase in reinsurance rates. The alternative
markets ceded premiums ratio, less the effect of premiums ceded to the unaffiliated captive insurers, reflected premiums ceded
to our external reinsurers related to the SPCs at Eastern Re. The reinsurance rates for our alternative market business varies by
program.
Net Premiums Earned
Net premiums earned were as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Gross premiums earned
Traditional business*
Alternative market business
Segment results
Less: Ceded premiums earned
Traditional business
Alternative market business*
Segment results
Net premiums earned
Traditional business
Alternative market business
$ 172,603 $ 170,492 $
80,698
253,301
75,658
246,150
9,937
15,956
25,893
9,446
15,889
25,335
162,666
161,046
64,742
59,769
Segment results
$ 227,408 $ 220,815 $
2,111
5,040
7,151
491
67
558
1,620
4,973
6,593
1.2%
6.7%
2.9%
5.2%
0.4%
2.2%
1.0%
8.3%
3.0%
* Traditional gross premiums earned and alternative market ceded premiums earned are reported net
of alternative market premiums assumed by our traditional business totaling $0.6 million and $0.9
million for the years ended December 31, 2017 and 2016, respectively.
77
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers
for their assumption of a portion of our losses. Because premiums are generally earned pro rata over the entire policy period,
fluctuations in premiums earned tend to lag those of premiums written. Our workers’ compensation policies are twelve month
policies and premiums are earned on a pro rata basis over the policy period. Net premiums earned also include premium
adjustments related to the audit of our insureds' payrolls. Payroll audits are conducted subsequent to the end of the policy
period and any related adjustments are recorded as fully earned in the current period. In addition, we record an estimate for
EBUB and evaluate the estimate on a quarterly basis. We did not adjust the EBUB estimate for the year ended December 31,
2017 and increased the estimate by $0.4 million for the year ended December 31, 2016. The increase in net premiums earned in
both our traditional and alternative market business primarily reflected the pro rata effect of higher net premiums written during
the preceding twelve months, partially offset by the aforementioned premium adjustments on retrospectively rated policies in
our traditional business.
Losses and Loss Adjustment Expenses
The following table summarizes calendar year net loss ratios by separating losses between the current accident year and
all prior accident years. Calendar year and current accident year net loss ratios by component were as follows:
Net Loss Ratios
Year Ended December 31
2017
Traditional
Business
Alternative
Market
Segment
Business
Results
62.6% 53.0% 59.9%
2016
Alternative
Market
Business
Traditional
Business
Segment
Results
Traditional
Business
Change
Alternative
Market
Business
Segment
Results
66.5% 55.7% 63.6%
(3.9)
(2.7)
(3.7)
(3.5%)
(13.3%)
(6.3%)
(1.0%)
(7.8%)
(2.8%)
(2.5)
(5.5)
(3.5)
66.1% 66.3% 66.2%
67.5% 63.5% 66.4%
(1.4)
2.8
(0.2)
—% (1.5%)
(0.4%)
—%
(1.2%)
(0.3%)
—
(0.3)
(0.1)
66.1% 67.8% 66.6%
67.5% 64.7% 66.7%
(1.4)
3.1
(0.1)
Calendar year net loss ratio *
Less impact of prior accident
years on the net loss ratio
Current accident year net loss
ratio
Less impact of audit premium
on loss ratio
Current accident year net loss
ratio, excluding the effect
of audit and return
premium
* The net loss ratios for the years ended December 31, 2017 and 2016 in the above table are calculated before the impact of $0.6 million and
$0.9 million, respectively, of premiums earned that is assumed by and ceded from the traditional and alternative markets business.
We recognized net favorable development related to our previously established reserves in both our traditional and
alternative market business of $14.3 million and $6.1 million for the years ended December 31, 2017 and 2016, respectively.
The decrease in the calendar year net loss ratio in our traditional business reflected net favorable development and an
improvement in the current accident year net loss ratio. We recognized $5.7 million and $1.6 million of net favorable
development in our traditional business during 2017 and 2016, respectively. The net favorable development for both 2017 and
2016 in our traditional business included $1.6 million related to amortization of the purchase accounting fair value adjustment.
Excluding the purchase accounting fair value adjustment in both periods, net favorable development increased $4.1 million in
2017 as compared to 2016 which primarily reflected better than expected claims results related to accident years 2015 and
2016. The improvement in the current accident year net loss ratio in our traditional business primarily reflected more favorable
trends in claims closing results in 2017 as compared to 2016, which reduced loss indications for the 2017 accident year.
The decrease in the calendar year net loss ratio in our alternative market business reflected net favorable development,
partially offset by an increase in the current accident year net loss ratio. Net favorable development in our alternative market
business totaled $8.6 million and $4.5 million for the years ended December 31, 2017 and 2016, respectively. The current
accident year net loss ratio for our alternative market business reflects the aggregate of loss ratios for all programs. Loss
reserves are estimated for each program on a quarterly basis. Due to the scale of some of the programs, quarterly claims activity
can cause the current accident year net loss ratio to fluctuate significantly from period to period. The increase in the current
accident year net loss ratio in our alternative market business primarily reflected severity-related claims activity during the
fourth quarter of 2017.
Calendar year ceded incurred losses in both our traditional and alternative market business totaled $44.0 million for the
year ended December 31, 2017 as compared to $35.6 million for 2016. In our traditional business, ceded incurred losses totaled
$25.1 million for the year ended December 31, 2017 as compared to $20.7 million for 2016. The increase in traditional ceded
78
incurred losses in 2017 primarily reflected four loss occurrences totaling $8.7 million. In our alternative market business, ceded
incurred losses totaled $18.9 million for the year ended December 31, 2017, compared to $14.9 million for 2016. The increase
reflected severity-related claims activity in certain programs, including one claim with ceded incurred losses of $2.1 million.
Additionally, the increase in claims severity impacted our traditional business reinsurance rates and we have not accrued any
return premium for the 2014, 2015 or 2016 reinsurance contract years as a result of the increase in ceded losses.
Within our alternative market business, audit premium from insureds results in a decrease in the net loss ratio, whereas
audit premium returned to insureds results in an increase in the net loss ratio. We recognized audit premium of $1.4 million and
$1.1 million in 2017 and 2016, respectively, the effect of which is reflected in the previous table.
In our traditional business, we estimate our current accident year loss and loss adjustment expenses based on an expected
loss ratio. Incurred losses and loss adjustment expenses are determined by applying the expected loss ratio to net premiums
earned, which includes audit premium, for the respective period. In our alternative market business, we estimate our current
accident year losses and loss adjustment expenses based on the underlying actuarial methodologies without consideration of
audit premium. As a result, we removed the effects of audit premium in the previous table for purposes of evaluating the
current accident year net loss ratio.
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses includes the amortization of commissions, premium taxes and
underwriting salaries, which are capitalized and deferred over the related workers’ compensation policy period, net of external
ceding commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our
contract acquisition efforts. These expenses also include a management fee charged by the Corporate segment, which
represents intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily
related to the acquisition of Eastern by ProAssurance. The management fee is based on the extent to which services are
provided to the subsidiary and the amount of premium written by the subsidiary.
The table below provides a comparison of underwriting, policy acquisition and operating expenses:
($ in thousands)
Traditional business
Alternative market business
Underwriting, policy acquisition
and operating expenses
Year Ended December 31
$
2017
51,038 $
19,907
Change
2016
52,207 $ (1,169)
1,650
18,257
(2.2%)
9.0 %
$
70,945 $
70,464 $
481
0.7 %
The decrease in underwriting, policy acquisition and operating expenses in our traditional business for 2017 as compared
to 2016 was driven by a decrease in intangible asset amortization of $2.2 million and the effect of a $1.0 million pension
settlement charge recorded during 2016 related to the termination of a legacy Eastern pension plan, partially offset by an
increase in acquisition and operating expenses during 2017.
79
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio for the Workers' Compensation segment included the impact of the following:
Year Ended December 31
2017
Alternative
Market
Business
Traditional
Business
Segment
Results
Traditional
Business
2016
Alternative
Market
Business
Segment
Results
Traditional
Business
Change
Alternative
Market
Business
Segment
Results
31.3%
31.1% 31.2%
32.2%
31.0% 31.9%
(0.9)
0.1
(0.7)
Underwriting expense ratio, as
reported*
Less estimated ratio increase
(decrease) attributable to:
Non-recurring/unusual
expenses
Amortization of intangible
assets
Management fees
—%
—% —%
1.9%
1.2%
—% 1.3%
—% 0.9%
0.6%
3.2%
1.1%
—%
0.4%
—%
—%
2.4%
0.8%
Impact of audit premium
(0.5%)
(0.7%)
(0.5%)
(0.9%)
(0.6%)
(0.8%)
Impact of return premium
estimate
Underwriting expense ratio,
less listed effects
—%
—% —%
(0.1%)
—% (0.1%)
28.7%
31.8% 29.5%
28.3%
31.6% 29.2%
(0.6)
(1.3)
0.1
0.4
0.1
0.4
—
—
—
(0.1)
—
0.2
(0.4)
(1.1)
0.1
0.3
0.1
0.3
* The underwriting expense ratios for 2017 and 2016 in the above table are calculated before the impact of $0.6 million and $0.9 million,
respectively, of premiums earned that is assumed by and ceded from the traditional and alternative markets business, respectively.
The increase in the traditional expense ratio for 2017, exclusive of the items noted in the table, primarily reflected an
increase in acquisition expenses and the effect of net retrospective return premium adjustments. Retrospective return premium
adjustments decreased earned premium by $1.9 million in 2017 as compared to $0.2 million in 2016. There were no other
individually significant variances by expense category that contributed to the increase in the expense ratio. The alternative
markets expense ratio primarily reflected ceding commissions, which vary by program.
Non-recurring expenses for the year ended December 31, 2016 in the above table reflected a pension settlement charge, as
discussed above.
Segregated Portfolio Cell Dividend Expense (Income)
Our Workers' Compensation segment provides turn-key workers' compensation alternative market solutions that include
program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management
services. The asset management and SPC management services are outsourced to a third party. Alternative market customers
include individual companies, groups and associations. SPC dividend expense (income) for each period represents the profit or
loss attributable to the alternative market business ceded to the SPCs of Eastern Re, net of any participation we have taken in
the SPCs.
The SPCs are segregated pools of assets and liabilities that provide an insurance facility for a defined set of risks. Assets
of each SPC are solely for the benefit of that individual cell and each SPC is solely responsible for the liabilities of that
individual cell. Assets of one SPC are statutorily protected from the creditors of the others. We participate to a varying degree
in the results of selected SPCs. As of December 31, 2017, our ownership interest in the SPCs in which we participate is as low
as 25% and as high as 85%. Under the SPC structure, the net operating results of each cell, net of our participation, are due to
the external owners of that cell.
The SPC financial results are included in the following table. The SPC dividend expense (income) represents the
operating results of each cell in the aggregate.
80
SPC dividend expense (income) was as follows:
($ in thousands)
Net premiums earned
Other income
Less: Net losses and loss adjustment expenses
Less: Underwriting, policy acquisition and operating expenses
SPC net operating results - profit/(loss)
Less: Eastern participation - profit/(loss)
SPC dividend expense (income)
Year Ended December 31
2017
64,099 $
115
2016
58,826 $
18
Change
5,273
9.0%
97
538.9%
34,003
19,907
10,304
32,743
18,258
7,843
4,476
5,828 $
3,081
4,762 $
1,260
1,649
2,461
1,395
1,066
3.8%
9.0%
31.4%
45.3%
22.4%
$
$
The increase in SPC dividend expense for 2017 as compared to 2016, primarily reflected an increase in net premiums
earned and net favorable development.
81
Segment Operating Results - Lloyd's Syndicate
Our Lloyd's Syndicate segment includes operating results from our participation in Lloyd's of London. We have a total
capital commitment to support our Lloyd's Syndicate operations through 2022 of up to $200 million. For the 2018 underwriting
year, we have satisfied our capital commitment with investment securities deposited with Lloyd's (also referred to as FAL)
which at December 31, 2017 had a fair value of approximately $123.9 million, as discussed in Note 3 of the Notes to
Consolidated Financial Statements.
We are the majority (58%) capital provider to Syndicate 1729, which covers a range of property and casualty insurance
and reinsurance lines. The remaining capital for Syndicate 1729 is provided by unrelated third parties, including private names
and other corporate members. Syndicate 1729 had a maximum underwriting capacity of £100.0 million for the 2017
underwriting year, of which £57.6 million ($77.8 million based on December 31, 2017 exchange rates) was our allocated
underwriting capacity. For the 2018 underwriting year, we increased our participation in the operating results of Syndicate 1729
from 58% to 62% and are satisfying our capital commitment to support Syndicate 1729 with our FAL securities, as discussed
above.
Beginning in 2018, our Lloyd's Syndicate segment will include the operating results of a newly formed SPA, Syndicate
6131. As a SPA, Syndicate 6131 is only allowed to underwrite one quota share reinsurance contract with Syndicate 1729. We
are the sole (100%) capital provider to Syndicate 6131 and are satisfying our capital commitment with our FAL securities, as
discussed above. Syndicate 6131 has a maximum underwriting capacity of £8.0 million (approximately $10.8 million at
December 31, 2017) for the 2018 underwriting year and will focus on contingency and specialty property business.
We normally report results from our involvement in Lloyd's Syndicates on a quarter delay, except when information is
available that is material to the current period. Furthermore, the investment results associated with our FAL investments and
certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame.
For the years ended December 31, 2017 and 2016, our Lloyd's Syndicate segment results include both our 58%
participation in the operating results of Syndicate 1729 and 100% of the operating results of our wholly owned subsidiaries that
support Syndicate 1729 and were composed as follows:
($ in thousands)
Gross premiums written
Ceded premiums written
Net premiums written
Net premiums earned
Net investment income
Net realized gains (losses)
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Income tax benefit (expense)
Segment operating results
Net loss ratio
Underwriting expense ratio
Year Ended December 31
$
$
$
$
$
$
2017
70,224
(15,255)
54,969
57,202
1,736
107
(1,476)
(44,220)
(26,963)
568
(13,046) $
$
2016
65,157
(8,883)
56,274
54,650
1,410
76
1,415
(34,116)
(22,832)
(384)
219
$
$
$
$
Change
5,067
(6,372)
(1,305)
2,552
326
31
(2,891)
(10,104)
(4,131)
952
(13,265)
7.8%
71.7%
(2.3%)
4.7%
23.1%
40.8%
(204.3%)
29.6%
18.1%
(247.9%)
(6,057.1%)
77.3%
47.1%
62.4%
41.8%
14.9 pts
5.3 pts
Segment operating results for the year ended December 31, 2017 included loss estimates in connection with Hurricanes
Harvey, Irma and Maria, which affected Texas, several states in the southeastern U.S. and islands in the Caribbean in 2017. We
estimated our allocated share (58%) of the net pre-tax losses to be approximately $7.1 million, which includes reinstatement
premiums we expect to receive from insureds as well as pay reinsurers, both of which are written and earned during the period.
82
The pre-tax impact of the recognition of these storm-related losses on the segment's operating results for the year ended
December 31, 2017 was as follows:
(In thousands)
Gross premiums written
Ceded premiums written
Net premiums written
Net premiums earned
Gross losses
Reinsurance recoveries
Net losses and loss adjustment expenses
Segment operating results, before tax
Year Ended
December 31, 2017
234
$
(2,209)
(1,975)
$
$
$
(1,975)
(36,297)
31,198
(5,099)
(7,074)
Premiums Written
Gross premiums written in 2017 consisted of casualty coverages (41% of total gross written premium), property insurance
coverages (37%), catastrophe reinsurance coverages (15%) and property reinsurance coverages (7%). Gross premiums written
increased during 2017 primarily due to new business written and volume increases on renewal business, partially offset by a
reduction in premiums assumed from our Specialty P&C segment, as discussed below. The increase in ceded premiums written
during 2017 was primarily due to the effect of revised terms on our reinsurance arrangements. In addition, the increase in ceded
premiums written during 2017 reflected the effect of reinsurance reinstatement premiums which represent premiums ceded to
reinsurers to restore coverage limits that have been exhausted as a result of storm-related losses under certain excess of loss
reinsurance treaties. Excluding the effects of the storm-related losses, net premiums written in 2017 increased slightly as
compared to 2016.
As discussed in our Specialty P&C segment operating results, Syndicate 1729 serves as a reinsurer on a quota share basis
for a wholly owned insurance subsidiary in our Specialty P&C segment. For premium assumed, we include in gross premiums
written an estimate of all premiums to be earned over the entire period covered by the reinsurance agreement, generally one
year, in the quarter in which the reinsurance agreement becomes effective. The quota share agreement with our Specialty P&C
segment renewed effective January 1, 2017 and reflected revised contract terms which reduced premium assumed by Syndicate
1729 by essentially half. Results from this ceding arrangement are reported in the Specialty P&C segment on the same quarter
delay in order to be consistent with the Lloyd's Syndicate segment as the effect of doing so is not material. We did not renew
the quota share agreement with our Specialty P&C segment on January 1, 2018, however, the impact will not be reflected in
either segment's operating results until the second quarter of 2018 due to the previously mentioned quarter delay.
The 2015 and 2014 calendar year quota share arrangements with our Specialty P&C segment were commuted in
December 2016 and 2015, respectively. Due to the reporting delay, the effect of the 2015 and 2014 commutation was reported
by both segments in results during the first quarters of 2017 and 2016, respectively, and is reflected in the years ended
December 31, 2017 and 2016, respectively. The commutations did not differ significantly from previously recorded amounts.
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers
for their assumption of a portion of our losses. Policies written to date primarily carry a term of one year. Because premiums
are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums
written. Additionally, premiums for certain policies and assumed reinsurance contracts are reported subsequent to the coverage
period and/or may be subject to adjustment based on loss experience. These premium adjustments are earned when reported,
which can result in further fluctuation in earned premium. Net premiums earned for the years ended December 31, 2017 and
2016 included premium assumed from our Specialty P&C segment of approximately $11.7 million and $14.0 million. In
addition, net premiums earned in 2017 were reduced by the effect of net reinsurance reinstatement premiums associated with
the storm-related losses, as previously discussed.
Net Losses and Loss Adjustment Expenses
Losses for the year were primarily recorded using the loss assumptions by risk category incorporated into the business
plan submitted to Lloyd's for Syndicate 1729 with consideration given to loss experience incurred to date. The assumptions
used in the business plan were consistent with loss results reflected in Lloyd's historical data for similar risks. We expect loss
ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the book begins to mature. The loss ratios
83
will also fluctuate due to the timing of earned premium adjustments (see discussion in this section under the heading "Net
Premiums Earned"). Premium and exposure for some of Syndicate 1729's insurance policies and reinsurance contracts are
initially estimated and subsequently adjusted over an extended period of time as underlying premium reports are received from
cedants and insureds. When reports are received, the premium, exposure and corresponding loss estimates are revised
accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the accident year in which the
premium is earned.
The net loss ratio increased by 14.9% in 2017 as compared to 2016 driven by the storm-related losses and associated net
reinsurance reinstatement premiums recognized during 2017, as previously discussed, which increased the net loss ratio by
approximately 11.2%. Additionally, the net loss ratio for 2016 was lower than in prior periods and reflected reductions
attributable to shifts in the mix of business.
Underwriting, Policy Acquisition and Operating Expenses
Underwriting expenses increased by $4.1 million for the year ended December 31, 2017 as compared to 2016 and
primarily reflected the anticipated growth in Syndicate 1729 operations. As operations have matured, the total amount of
underwriting salaries has increased along with the number of policies successfully written. Underwriting compensation is
capitalized as DPAC only when efforts are successful. The increase in the expense ratio for 2017 was primarily due to the
timing of certain expenses relative to the increase in earned premiums.
Net Investment Income
Net investment income for the years ended December 31, 2017 and 2016 was primarily attributable to interest earned on
the FAL investments. Our FAL investments are primarily short-term investments and investment-grade corporate debt
securities.
Taxes
Operating results of this segment are subject to U.K. income tax law. Tax expense incurred in 2016 reflected the use of
prior year Syndicate 1729 operating losses to offset current period Syndicate 1729 operating results.
84
Segment Operating Results - Corporate
Our Corporate segment includes investment operations, interest expense and U.S. income taxes, all of which are managed
at the corporate level with the exception of investment assets solely allocated to Lloyd's Syndicate operations as discussed in
Note 15 of the Notes to Consolidated Financial Statements. Our Corporate segment operating results also reflect non-premium
revenues generated outside of our insurance entities and corporate expenses. Segment operating results for our Corporate
segment were net earnings of $48.1 million and $54.9 million for the years ended December 31, 2017 and 2016, respectively,
and included the following:
Net investment income
($ in thousands)
Equity in earnings (loss) of unconsolidated subsidiaries
Net realized gains (losses)
Operating expense
Segregated portfolio cells dividend expense (income) (1)
Interest expense
Income tax expense (benefit)
2017
93,926
8,033
16,302
29,275
4,973
16,844
21,927
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Represents the investment results attributable to the SPCs at Eastern Re
Year Ended December 31
2016
Change
$
98,602
(5,762) $
34,799
30,807
3,236
15,032
24,736
(4,676)
13,795
$ (18,497)
(1,532)
$
1,737
$
$
$
1,812
(2,809)
(4.7%)
239.4%
(53.2%)
(5.0%)
53.7%
12.1%
(11.4%)
Net Investment Income, Equity in Earnings (Loss) of Unconsolidated Subsidiaries, Net Realized Investment Gains
(Losses)
Net Investment Income
Net investment income is primarily derived from the income earned by our fixed maturity securities and also includes
dividend income from equity securities, income from our short-term and cash equivalent investments, earnings from other
investments and increases in the cash surrender value of BOLI contracts. Investment fees and expenses are deducted from
investment income.
Net investment income by investment category was as follows:
($ in thousands)
Fixed maturities
Equities
Other investments, including Short-term
BOLI
Investment fees and expenses
Net investment income
Year Ended December 31
2017
73,944
17,198
7,662
1,979
(6,857)
93,926
$
$
2016
$
84,386
14,887
3,353
2,008
(6,032)
98,602
$
Change
$ (10,442)
2,311
4,309
(29)
(825)
(4,676)
$
(12.4%)
15.5%
128.5%
(1.4%)
13.7%
(4.7%)
Fixed Maturities
The decrease in our income from fixed maturity securities during 2017 was due to lower yields and lower average
investment balances. We reduced the size of our fixed portfolio over the last year in order to pay dividends and invest in other
asset classes. On an overall basis, our average investment in fixed maturity securities was approximately 7.0% lower in 2017 as
compared to 2016.
Average yields for our fixed maturity portfolio were as follows:
Average income yield
Average tax equivalent income yield
Year Ended December 31
2017
3.1%
3.5%
2016
3.3%
3.8%
85
Equities
Income from our equity portfolio increased for the year ended December 31, 2017 as compared to 2016 which reflected
an increase in our allocation to this asset category as well as a different mix of equities owned.
Other Investments and Short-term Investments
Income from our other investments and short-term investments consists primarily of distributions from our LPs that are
accounted for under the cost method. Distributions from LPs are affected by the volatility of equity and credit markets. The
increase in this category during 2017 was primarily due to higher reported earnings from one of our LPs which focuses on the
energy sector.
Investment Fees and Expenses
Investment fees and expenses increased for the year ended December 31, 2017 as compared to 2016 primarily due to an
increase in subsequent interest expense on our LP subscriptions and incentive fees on our convertible bond portfolio.
Subsequent interest expense on some of our LPs is paid on subscriptions that occur later in the fund-raising process and
incentive fees for returns that exceed a high water mark on our convertible bond portfolio reflected an increase in the fair value
of the portfolio.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries is derived from our investment interests accounted for under the
equity method. Results were as follows:
($ in thousands)
Equity method investments, primarily LPs/LLCs
$
Tax credit partnerships
Equity in earnings (loss) of unconsolidated subsidiaries $
2017
28,685
(20,652)
8,033
Year Ended December 31
2016
Change
$
$
$
19,055
(24,817)
(5,762) $
9,630
4,165
13,795
50.5%
(16.8%)
239.4%
We hold interests in certain LPs/LLCs that generate earnings from trading portfolios, secured debt, debt securities, multi-
strategy funds and private equity investments. The performance of the LPs/LLCs is affected by the volatility of equity and
credit markets. Our investment results from our portfolio of investments in LPs/LLCs for 2017 were affected primarily by our
share of higher reported earnings from our LP/LLC investments.
Our tax credit investments are designed to generate returns in the form of tax credits and tax-deductible project operating
losses and are comprised of qualified affordable housing project tax credit partnership interests and historic tax credit interests.
We account for our tax credit investments under the equity method and record our allocable portion of the operating losses of
the underlying properties based on estimates provided by the partnerships. For our qualified affordable housing project tax
credit partnership interests we adjust our estimates of our allocable portion of operating losses periodically as actual operating
results of the underlying properties become available. Our historic tax credit investments are short-term in nature and
remaining operating losses are expected to be recognized primarily in 2018. Based on operating results received, we increased
our estimate of partnership operating losses by $2.1 million for the year ended December 31, 2017, as compared to $10.2
million for the same respective period in 2016, predominantly related to our qualified affordable housing project tax credit
partnership interests.
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above,
reduced our tax expenses in 2017 and 2016 as follows:
(In millions)
Tax credits recognized during the period
Tax benefit of tax credit partnership operating losses
Year Ended December 31
2017
2016
$
$
23.1
7.2
$
$
27.5
8.7
Tax credits provided by the underlying projects of the historic tax credit partnerships are typically available in the tax
year in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax
credit partnerships are provided over approximately a ten year period. The decrease in tax credits recognized in 2017 was
primarily attributable to our historic tax credit partnership investments.
86
Non-GAAP Financial Measure – Tax Equivalent Investment Result
We believe that to fully understand our investment returns it is important to consider the current tax benefits associated
with certain investments as the tax benefit received represents a portion of the return provided by our tax-exempt bonds, BOLI,
common and preferred stocks, and tax credit partnership investments (our tax-preferred investments). We impute a pro forma
tax-equivalent result by estimating the amount of fully-taxable income needed to achieve the same after-tax result as is
currently provided by our tax-preferred investments. We believe this better reflects the economics behind our decision to invest
in certain asset classes that are either taxed at lower rates and/or result in reductions to our current federal income tax expense.
Our pro forma tax-equivalent investment result is shown in the table that follows as is a reconciliation of our GAAP net
investment result to our tax equivalent investment result.
(In thousands)
GAAP net investment result:
Net investment income
Equity in earnings (loss) of unconsolidated subsidiaries
GAAP net investment result
Year Ended December 31
2017
2016
$
93,926
8,033
$ 101,959
$
$
98,602
(5,762)
92,840
Pro forma tax-equivalent investment result
$ 149,612
$ 149,959
Reconciliation of pro forma and GAAP tax-equivalent
investment result:
GAAP net investment result
Taxable equivalent adjustments, calculated using the 35%
federal statutory tax rate:
State and municipal bonds
BOLI
Dividends received
Tax credit partnerships
$ 101,959
$
92,840
9,103
1,065
1,930
35,555
11,698
1,081
1,957
42,383
Pro forma tax-equivalent investment result
$ 149,612
$ 149,959
87
Net Realized Investment Gains (Losses)
The following table provides detailed information regarding our net realized investment gains (losses).
(In thousands)
OTTI losses, total:
State and municipal bonds
Corporate debt
Investment in unconsolidated subsidiaries
Other investments
Portion of OTTI losses recognized in other comprehensive income before taxes:
Corporate debt
Net impairment losses recognized in earnings
Gross realized gains, available-for-sale securities
Gross realized (losses), available-for-sale securities
Net realized gains (losses), trading securities
Net realized gains (losses), other investments
Change in unrealized holding gains (losses), trading securities
Change in unrealized holding gains (losses), convertible securities, carried at fair
value as a part of Other investments
Other
Year Ended December 31
2017
2016
$
(850) $
(419)
(11,931)
—
(100)
(7,604)
—
(3,130)
248
(12,952)
6,622
(3,113)
10,724
2,963
11,157
896
5
1,068
(9,766)
12,402
(7,029)
6,632
1,115
30,521
899
25
Net realized investment gains (losses)
$
16,302
$
34,799
During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early
stage business investment accounted for under the equity method. This impairment charge represented the difference between
the investment's carrying value and fair value, which was measured as our ownership percentage in the projected earnings
expected to be generated by the investment. In addition, we recognized OTTI in earnings of $3.4 million related to our
qualified affordable housing project tax credit investments. The current estimated tax benefits expected to be received from our
allocable portion of the operating losses of the underlying properties have declined, due to the newly enacted corporate tax rate
of 21%, as compared to those at the time the investments were acquired. During 2017, we also recognized credit-related OTTI
in earnings of $0.2 million and non-credit OTTI of $0.2 million in OCI, both of which related to corporate bonds.
During 2016, we recognized OTTI in earnings of $9.8 million, including credit-related OTTI of $5.5 million related to
debt instruments from ten issuers in the energy sector. The fair value of these bonds declined during 2016 as did the credit
quality of the issuers, and we recognized credit-related OTTI to reduce the amortized cost basis of the bonds to the present
value of future cash flows we expected to receive from the bonds. During 2016, we also recognized non-credit impairments of
$0.9 million in OCI relative to the bonds of these issuers, as the fair value of the bonds was less than the present value of the
expected future cash flows from the securities.
We also recognized $3.1 million OTTI in earnings during 2016 related to our interest in an investment fund that is
accounted for using the cost method (classified as other investments). The fund is focused on the energy sector and securities
held by the fund declined in value during 2016. An OTTI was recognized to reduce our carrying value of the investment to the
NAV reported by the fund.
Operating Expenses
Corporate segment operating expenses for the years ended December 31, 2017 and 2016, respectively, were comprised as
follows:
($ in thousands)
Operating expenses
Management fee offset
Segment Total
2017
44,034
(14,759)
29,275
$
$
Year Ended December 31
2016
Change
$
$
45,116
(14,309)
30,807
$
$
(1,082)
(450)
(1,532)
(2.4%)
3.1%
(5.0%)
88
The decrease in operating expenses during 2017 was primarily due to the effect of costs incurred in 2016 related to a pre-
acquisition liability from a discontinued operation that did not reoccur in 2017 and, to a lesser extent, a decrease in
compensation related costs in 2017. The decrease in compensation related costs in 2017 was primarily due to lower share based
compensation expense, partially offset by higher salaries and benefits. The decrease in operating expenses was partially offset
by an increase in costs incurred for technology enhancements in 2017.
Operating subsidiaries within our Specialty P&C and Workers' Compensation segments are charged a management fee by
the Corporate segment for services provided to these subsidiaries. The management fee is based on the extent to which services
are provided to the subsidiary and the amount of premium written by the subsidiary. Under the arrangement, the expenses
associated with such services are reported as expenses of the Corporate segment, and the management fees charged are reported
as an offset to Corporate operating expenses. While the terms of the management arrangement were consistent between 2016
and 2017, fluctuations in the amount of premium written by each subsidiary can result in corresponding variations in the
management fee charged to each subsidiary during a particular period.
Segregated Portfolio Cell Dividend Expense (Income)
During the first quarter of 2017, we began reporting in the Corporate segment the portion of the SPC dividend expense
(income) that is attributable to the investment results of the SPCs, all of which are reported in the Corporate segment, to better
align the expense with the related investment results of the SPCs. For comparative purposes, we have reflected the SPC
dividend expense for the prior periods in the same manner. SPC dividend expense was $5.0 million and $3.2 million for the
years ended December 31, 2017 and 2016, respectively. See further information on our SPCs in our Workers' Compensation
segment results section under the heading "Underwriting, Policy Acquisition and Operating Expense."
Interest Expense
Interest expense for the years ended December 31, 2017 and 2016, respectively, was comprised as follows:
Senior Notes due 2023
($ in thousands)
Year Ended December 31
2017
$ 13,429
2016
$ 13,429
$
Change
—
Revolving Credit Agreement (including fees and amortization)
2,974
1,564
Mortgage Loans (including amortization)
(Gain)/loss on interest rate cap
Other
Interest expense
65
339
37
—
—
39
$ 16,844
$ 15,032
$
1,410
65
339
(2)
1,812
—%
90.2%
nm
nm
(5.1%)
12.1%
Interest expense increased during 2017 as compared to 2016 driven primarily by an increase in our weighted average
outstanding debt, which was $421 million for the year ended December 31, 2017, as compared to $351 million for the same
respective period of 2016, and, to a lesser extent, an increase in the average interest rate on the outstanding borrowings under
our Revolving Credit Agreement. In addition, interest expense for the year ended December 31, 2017 included the change in
fair value recognized on the interest rate cap entered into during the fourth quarter of 2017. The interest rate cap is designated
as an economic hedge of interest rate risk associated with our variable rate Mortgage Loans. See further discussion of our
outstanding debt in Note 9 and further discussion of our interest rate cap agreement in Note 10 of the Notes to Consolidated
Financial Statements.
89
Taxes
Tax expense allocated to our Corporate segment includes U.S. tax only, which would include U.S. tax expense incurred
from our corporate membership in Lloyd's of London. The U.K. tax expense incurred by the U.K. based subsidiaries of our
Lloyd's Syndicate segment is allocated to that segment. Consolidated tax expense reflects tax expense of both segments, as
shown in the table below:
(In thousands)
Corporate segment income tax expense (benefit)
Lloyd's Syndicate segment income tax expense (benefit)
Consolidated income tax expense (benefit)
Year Ended
December 31
2017
21,927
(568)
21,359
$
$
2016
24,736
384
25,120
$
$
Factors affecting our consolidated effective tax rate include the following:
Statutory rate
Tax-exempt income*
Tax credits
Non-U.S. operating results
Excess tax benefit on share-based compensation
Change in federal corporate tax rate
Change in limitation of future deductibility of certain
executive compensation
Other
Effective tax rate
Year Ended
December 31
2017
35.0%
(6.5%)
(18.0%)
0.7%
(2.1%)
5.1%
2.7%
(0.3%)
16.6%
2016
35.0%
(5.6%)
(15.6%)
(1.0%)
—%
—%
—%
1.5%
14.3%
* Includes tax-exempt interest, dividends received deduction and change in cash surrender
value of BOLI.
Our effective tax rate for 2017 and 2016 was 16.6% and 14.3%, respectively, and differs from the statutory federal
income tax rate primarily due to a portion of our investment income being tax-exempt, the utilization of tax credits transferred
to us from our tax credit partnership investments and the impact of the remeasurement of our deferred tax assets and liabilities
as a result of the enactment of the TCJA in 2017.
As previously discussed, the TCJA was signed into law on December 22, 2017. Under current accounting guidance, the
effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. Due to the
enactment of the TCJA in 2017, we remeasured our deferred tax assets and liabilities based on the new corporate tax rate and
recognized a charge of $6.5 million to income tax expense for the year ended December 31, 2017, which resulted in a 5.1%
increase to our effective tax rate in 2017. Additionally, we made a reasonable estimate of the effects on our existing deferred tax
asset balances at December 31, 2017 as it relates to the limitation on the future deductibility of certain executive compensation
and recorded a provisional charge to income tax expense of $3.5 million, which resulted in a 2.7% increase to our effective tax
rate in 2017. Any future guidance addressing the effects of the TCJA on executive compensation could result in a change to this
provisional amount. See further discussion on the impact of the TCJA under the heading "Deferred Taxes" in our Critical
Accounting Estimates section.
Tax credits utilized were $23.1 million for 2017 as compared to $27.5 million for 2016. The reducing effect of tax credits
on the effective tax rate was greater in 2017 due to lower pre-tax income in 2017 as compared to 2016. As previously
discussed, the enactment of the TCJA in 2017 lowered the corporate tax rate effective January 1, 2018. While the enactment of
the TCJA will not impact the amount of the tax credits we will receive, we expect the future utilization of our tax credits to take
longer than in previous years due to the lower corporate tax rate.
One additional item of note impacting our effective tax rate in 2017 was the excess tax benefit on share-based
compensation that resulted from the application of revised accounting guidance, which was effective January 1, 2017 and
resulted in a 2.1% reduction to our effective tax rate in 2017. Under the revised accounting guidance, the difference between
the income tax deduction, which is based upon the fair market value of share-based awards and the time of vesting, and the
compensation cost recognized in the financial statements, which is based upon the fair market value of the share-based awards
90
on the date of grant, is to be recognized as income tax expense (benefit) in the current period rather than an adjustment to OCI
as was required under the previous guidance. See Note 1 of the Notes to Consolidated Financial Statements for further
discussion on the adoption of the guidance.
91
Results of Operations - Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Selected consolidated financial data for each period is summarized in the table below.
($ in thousands, except per share data)
2016
2015
Change
Year Ended December 31
Revenues:
Net premiums written
Net premiums earned
Net investment result
Net realized investment gains (losses)
Other income
Total revenues
Expenses:
Losses and loss adjustment expenses
Reinsurance recoveries
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Segregated portfolio cells dividend expense (income)
Interest expense
Total expenses
Income before income taxes
Income tax expense (benefit)
Net income
Non-GAAP operating income
Earnings per share:
Basic
Diluted
Non-GAAP operating earnings per share:
Basic
Diluted
Net loss ratio
Underwriting expense ratio
Combined ratio
Operating ratio
Effective tax rate
Return on equity
$ 738,533
$ 709,285
$ 733,281
$ 694,149
$
$
94,250
34,875
7,808
870,214
515,242
(72,013)
443,229
227,610
8,142
15,032
694,013
112,342
(41,639)
7,227
772,079
456,862
(46,151)
410,711
217,064
853
14,596
643,224
$
$
$
$
$
$
176,201
128,855
25,120
12,658
$ 151,081
$ 116,197
$ 129,844
$ 142,629
$
$
$
$
$
$
$
$
2.84
2.83
2.44
2.43
60.4%
31.0%
91.4%
77.8%
14.3%
8.0%
2.12
2.11
2.60
2.59
59.2%
31.3%
90.5%
74.8%
9.8%
5.6%
29,248
39,132
(18,092)
76,514
581
98,135
58,380
(25,862)
32,518
10,546
7,289
436
50,789
47,346
12,462
34,884
(12,785)
0.72
0.72
(0.16)
(0.16)
1.2 pts
(0.3) pts
0.9 pts
3.0 pts
4.5 pts
2.4 pts
In all tables that follow, that abbreviation "nm" indicates that the information or the percentage change is not meaningful.
92
Executive Summary of Operations
The following sections provide an overview of our consolidated and segment results of operations for the year ended
December 31, 2016 as compared to 2015. See the Segment Operating Results sections that follow for additional information
regarding each segment's operating results.
Revenues
Our consolidated and segment net premiums earned were as follows:
($ in thousands)
2016
2015
Change
Year Ended December 31
Net Premiums Earned
Specialty P&C
$ 457,816
$ 443,313
$ 14,503
Workers' Compensation
220,815
213,161
Lloyd's Syndicate
54,650
37,675
7,654
16,975
Consolidated total
$ 733,281
$ 694,149
$ 39,132
3.3%
3.6%
45.1%
5.6%
Consolidated net premiums earned increased in 2016 as compared to 2015 driven by increases in net premiums earned
from both our Lloyd's Syndicate segment and our Specialty P&C segment. The increase from our Specialty P&C segment was
primarily due to $11.8 million in premium earned from a novation entered into during the fourth quarter of 2016 (see further
discussion in our Segment Operating Results - Specialty Property & Casualty section that follows).
The following table shows our consolidated net investment result:
Net investment income
($ in thousands)
Equity in earnings (loss) of unconsolidated subsidiaries
Net investment result
Year Ended December 31
2016
$ 100,012
(5,762)
$ 94,250
2015
$ 108,660
3,682
$ 112,342
Change
$ (8,648)
(9,444)
$ (18,092)
(8.0%)
(256.5%)
(16.1%)
The decrease in our consolidated net investment result in 2016 was primarily attributable to an $11.5 million reduction in
earnings from our fixed income portfolio, which reflected both lower average investment balances and lower yields, and a
reduction in earnings from our unconsolidated subsidiaries. The reduction in earnings from our unconsolidated subsidiaries was
primarily attributable to an acceleration of the recognition of tax credit partnership operating losses for 2016, partially offset by
higher reported earnings from our investments in LP/LLCs. Operating losses on our tax credit partnerships were partially offset
by reductions in our tax provision.
We had net realized investment gains of $34.9 million in 2016 as compared to net realized investment losses of $41.6
million in 2015. OTTI recognized in earnings were $9.8 million in 2016 and $15.3 million in 2015.
93
Expenses
The following table shows our consolidated and segment net loss ratios:
($ in millions)
2016
2015
Change
Year Ended December 31
Current accident year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Calendar year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
80.1%
88.6%
66.4%
63.3%
60.4%
58.7%
63.6%
62.4%
82.4%
92.3%
67.1%
66.8%
59.2%
56.4%
66.0%
66.8%
(2.3) pts
(3.7) pts
(0.7) pts
(3.5) pts
1.2 pts
2.3 pts
(2.4) pts
(4.4) pts
Favorable net loss development, prior
accident years
Consolidated
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
$ 143.8
$ 137.2
$
$
6.1
0.5
$ 161.2
$ 159.0
$ (17.4)
$ (21.8)
$
3.9
2.2
$
$ — $
0.5
Our consolidated current accident year net loss ratio decreased 2.3 percentage points for the year ended December 31,
2016 as compared to 2015 driven by a lower net loss ratio in our Specialty P&C segment primarily due to changes in expected
loss costs related to mass tort litigation and, to a lesser extent, changes in the mix of business. The decrease in the consolidated
current accident year net loss ratio was somewhat offset by a change in expense allocations, as discussed below.
Our consolidated calendar year net loss ratio was lower than our consolidated current accident year net loss ratio due to
the recognition of net favorable loss development, as shown in the previous table.
Our consolidated and segment underwriting expense ratios were as follows:
Underwriting Expense Ratio
Consolidated
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Corporate*
Year Ended December 31
2016
2015
Change
31.0%
22.8%
31.9%
41.8%
4.2%
31.3%
23.8%
29.9%
49.2%
3.5%
(0.3) pts
(1.0) pts
2.0 pts
(7.4) pts
0.7 pts
*There are no net premiums earned associated with the Corporate segment. Ratios shown are the contribution of the Corporate
segment to the consolidated ratio (Corporate operating expenses divided by consolidated net premium earned).
The slight decrease in our 2016 consolidated expense ratio was primarily attributable to an increase in net premiums
earned for the period, the effect of which was offset, to an extent, by an increase in underwriting expenses.
The primary components of the consolidated increase in underwriting, policy acquisition and operating expenses for 2016
were:
• Increase in consolidated DPAC amortization by $8.8 million particularly in the Lloyd's Syndicate segment.
• Increase in operating expenses in our Corporate segment by $6.3 million primarily related to costs associated with
a pre-acquisition liability from a discontinued operation and an increase in share-based compensation expenses
resulting from an adjustment of the projected award value based upon the improvement, in the period, of one of the
performance metrics associated with a particular year's award.
94
• Increase in operating expenses in our Workers' Compensation segment of $3.5 million primarily due to an increase
in compensation and related benefit costs, state assessments and pension settlement charges.
There was a $5.4 million decrease in consolidated underwriting expenses in 2016 as compared to 2015 that reflected a
current year change in how the management fee was considered and allocated to Losses and loss adjustment expenses. This
change had a $5.4 million offsetting effect on consolidated losses and thus did not affect consolidated net income. Likewise, the
change resulted in a 0.8 point decrease in our consolidated underwriting expense ratio which was completely offset by a 0.8
point increase in our consolidated net loss ratio. We believe this change better reflects the involvement of senior management at
a corporate level and their oversight of the claims process at the segment level.
Taxes
Our effective tax rate was 14.3% for the year ended December 31, 2016, as compared to our 2015 effective tax rate of
9.8%. The increase in the rate for the year ended December 31, 2016 was primarily due to net realized investment gains as
compared to net realized investment losses during 2015.
Operating Ratio and Return on Equity
Our operating ratio (calculated as our combined ratio, less our investment income ratio) increased by 3.0 percentage
points in the year ended December 31, 2016, which reflected a higher net loss ratio driven by a lower amount of prior year
favorable development in our Specialty P&C segment and a lower investment ratio due to a decline in income from our fixed
maturity securities.
ROE was 8.0% for the year ended December 31, 2016 and was 5.6% for the year ended December 31, 2015. The increase
in 2016 was primarily due to net realized investment gains as compared to net realized investment losses during 2015.
Book Value per Share
We believe our commitment to share repurchases and the declaration of dividends are currently our most effective uses of
capital even though, in the short-term, dividends and significant share repurchases above book value dampen growth in book
value per share. Our book value per share at December 31, 2016 as compared to December 31, 2015 is shown in the following
table.
Book Value Per Share at December 31, 2015
Increase (decrease) to book value per share during the year ended
Book Value Per
Share
$
36.88
December 31, 2016 attributable to:
Dividends declared
Cumulative repurchase of shares
Capital management activities
Net income
Decrease in AOCI
Other
Book Value Per Share at December 31, 2016
$
(5.93)
(0.47)
(6.40)
2.84
(0.12)
0.58
33.78
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Non-GAAP Financial Measures
Non-GAAP operating income is a financial measure that is widely used to evaluate performance within the insurance
sector. In calculating Non-GAAP operating income, we have excluded the after-tax effects of the items listed in the following
table that do not reflect normal operating results. We believe Non-GAAP operating income presents a useful view of the
performance of our insurance operations, however should be considered in conjunction with net income computed in
accordance with GAAP.
The following table is a reconciliation of net income to Non-GAAP operating income:
(In thousands, except per share data)
Net income
Items excluded in the calculation of Non-GAAP operating income:
Year Ended December 31
2016
2015
$
151,081
$
116,197
Net realized investment (gains) losses
(34,875)
41,639
Net realized gains (losses) attributable to SPCs which no profit/
loss is retained (1)
Guaranty fund assessments (recoupments)
Pre-tax effect of exclusions
Tax effect, at 35% (2)
Non-GAAP operating income
Per diluted common share:
Net income
Effect of exclusions
Non-GAAP operating income per diluted common share
2,049
153
(32,673)
11,436
129,844
2.83
(0.40)
2.43
$
$
$
(1,192)
218
40,665
(14,233)
142,629
2.11
0.48
2.59
$
$
$
(1) Net realized investment gains (losses) on investments related to our SPCs are recognized in the earnings of our
Corporate segment and the portion of earnings related to the gain or loss, net of our participation, is distributed
back to the cells through our SPC dividend expense (income). To be consistent with our exclusion of net realized
investment gains (losses) recognized in earnings, we are excluding the portion of net realized investment gains
(losses) that is included in SPC dividend expense (income).
(2) The 35% rate above is the annual expected incremental tax rate associated with the taxable or tax deductible items
listed. The effective tax rate applied to these items in calculating net income during 2016 and 2015 was 14.3%
and 9.8%, respectively.
96
Segment Operating Results - Specialty Property & Casualty
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance as
discussed in Note 15 of the Notes to Consolidated Financial Statements. Specialty P&C segment operating results reflect pre-
tax underwriting profit or loss from these insurance lines, exclusive of investment results, which are included in our Corporate
segment. Segment operating results were $90.1 million for the year ended December 31, 2016 and $92.1 million for the same
respective period of 2015, and included the following:
($ in thousands)
Net premiums written
Net premiums earned
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Segregated portfolio cells dividend (expense) income
Segment operating results
Net loss ratio
Underwriting expense ratio
Premiums Written
$
$
$
Year Ended December 31
$
$
$
2016
458,681
457,816
5,306
(268,579)
(104,333)
(144)
90,066
58.7%
22.8%
2015
Change
442,126
$ 16,555
3.7%
443,313
$ 14,503
4,561
(250,168)
(105,574)
—
92,132
745
(18,411)
1,241
(144)
$ (2,066)
3.3%
16.3%
7.4%
(1.2%)
nm
(2.2%)
56.4%
23.8%
2.3 pts
(1.0) pts
Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of
new business, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by
rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written
through multi-period policies. In addition, premium volume may periodically be affected by shifts in the timing of renewals
between periods. The healthcare professional liability market, which accounts for a majority of the revenues in this segment,
remains challenging as physicians continue joining hospitals or larger group practices and are thus no longer purchasing
insurance in the standard market. In addition, some competitors have chosen to compete primarily on price; both factors impact
our ability to write new business and retain existing business.
Gross, ceded and net premiums written were as follows:
($ in thousands)
Gross premiums written
2016
$ 535,725
2015
$ 526,296
Less: Ceded premiums written
77,044
84,170
Net premiums written
$ 458,681
$ 442,126
Change
$
$
9,429
(7,126)
16,555
1.8%
(8.5%)
3.7%
Year Ended December 31
97
Gross Premiums Written
Gross premiums written by component were as follows:
($ in thousands)
2016
2015
Change
Year Ended December 31
Professional liability
Physicians (1)(7)
Twelve month term
Twenty-four month term
Total Physicians
Healthcare facilities (2)(7)
Other healthcare providers (3)(7)
Legal professionals (4)
Tail coverages (5)
Total professional liability
Medical technology liability (6)
Other
Total
$ 344,150
$ 345,363
$
21,869
366,019
59,361
33,353
25,351
18,092
502,176
29,707
375,070
36,840
32,503
27,879
19,520
491,812
33,067
482
$ 535,725
33,237
1,247
$ 526,296
$
(1,213)
(7,838)
(9,051)
22,521
850
(2,528)
(1,428)
10,364
(170)
(765)
9,429
(0.4%)
(26.4%)
(2.4%)
61.1%
2.6%
(9.1%)
(7.3%)
2.1%
(0.5%)
(61.3%)
1.8%
(1) Physician policies were our greatest source of premium revenues in both 2016 and 2015. The decline in twelve month
term policies in 2016 was primarily due to retention losses, including the non-renewal of a few large policies in 2016,
and the shifting of certain policies from a twelve month term to a twenty-four month term, largely offset by new
business written. We offer twenty-four month term policies to our physician insureds in one selected jurisdiction. The
net decline in twenty-four month premium, as compared to 2015, primarily reflected the normal cycle of renewals
(policies subject to renewal in 2016 were previously written in 2014 rather than in 2015).
(2) Our healthcare facilities premium (which includes hospitals, surgery centers and other facilities) increased in 2016
primarily due to new business written, which includes premiums written in our SPCs (see discussion in footnote 7
below). In addition, the increase also reflected a novation agreement entered into during the fourth quarter of 2016. A
novation represents a legal replacement of one insurer by another extinguishing the ceding entity's liability to the
policyholder. The novation resulted in approximately $11.8 million of one-time gross premiums written and earned at
the inception of the agreement as all the underlying loss events covered by the policy occurred in the past. The increase
was partially offset by retention losses, including the non-renewal of one large policy in the first quarter of 2016.
(3) Our other healthcare providers are primarily dentists, chiropractors and allied health professionals.
(4) Our legal professionals policies are primarily individual and small group policies in select areas of practice. The decline
in 2016 was primarily due to retention losses, partially offset by new business written. Retention losses were primarily
driven by an increase in renewal pricing in certain jurisdictions as well as stricter underwriting standards.
(5) We offer extended reporting endorsement or "tail" coverage to insureds who discontinue their claims-made coverage
with us, and we also periodically offer tail coverage through custom policies. The amount of tail coverage premium
written can vary widely from period to period.
(6) Our medical technology liability business is marketed throughout the U.S.; coverage is offered on a primary basis,
within specified limits, to manufacturers and distributors of medical technology and life sciences products including
entities conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our
medical technology liability premium volume is impacted by the sales volume of insureds. The slight decline in 2016
was primarily driven by retention losses and, to a lesser extent, a decrease in the rate charged for certain renewed
policies, almost entirely offset by new business written.
(7) During 2016, we expanded our alternative market solutions by writing new healthcare premium in certain SPCs. We
added approximately $4.1 million in healthcare professional liability premium during the year ended 2016 which
included $1.2 million written in our physicians line of business, $2.9 million in our healthcare facilities line of business
and a nominal amount written in our other healthcare providers line of business. All or a portion of the premium written
was ceded to the SPCs at our wholly owned Cayman Islands reinsurance subsidiary, Eastern Re. Under the SPC
structure, the net operating results of each cell, net of any participation we have taken in the SPCs, are due to the
external owners of that cell. Our Specialty P&C segment does not currently participate in the cells that write HCPL
premium, and therefore retains no underwriting profit or loss. However, we receive ceding commissions on the
98
premium written which totaled $0.7 million during the year ended December 31, 2016. Additional information
regarding the SPCs is included in the Underwriting, Policy Acquisition and Operating Expense section that follows.
New business written by component on a direct basis was as follows:
(In millions)
Physicians
Healthcare facilities
Other healthcare providers
Legal professionals
Medical technology liability
Total
Year Ended December 31
2016
2015
$
32.8
17.4
3.4
3.8
5.1
$
23.0
5.9
2.3
4.5
3.7
$
62.5
$
39.4
We calculate our retention rate as annualized renewed premium divided by all annualized premium subject to renewal.
Retention rates are affected by a number of factors. We may lose insureds to competitors or to alternative insurance
mechanisms such as risk retention groups or self-insurance entities (often when physicians join hospitals or large group
practices) or due to pricing or other issues. We may choose not to renew an insured as a result of our underwriting evaluation.
Insureds may also terminate coverage because they have left the practice of medicine for various reasons, principally for
retirement, death or disability, but also for personal reasons.
Retention by component was as follows:
Physicians
Healthcare facilities*
Other healthcare providers
Legal professionals
Medical technology liability
Year Ended December 31
2016
2015
88%
79%
85%
78%
85%
89%
85%
85%
78%
81%
* See Gross Premiums Written section above for further explanation of retention
decline in 2016.
The pricing of our business includes the effects of filed rates, surcharges and discounts. We continue to base our pricing
on expected losses, as indicated by our historical loss data and available industry loss data. We are committed to a rate structure
that will allow us to fulfill our obligations to our insureds, while generating competitive returns for our shareholders.
Changes in renewal pricing by component was as follows:
Physicians
Healthcare facilities*
Other healthcare providers*
Legal professionals
Medical technology liability*
Year Ended
December 31
2016
—%
6%
1%
5%
(1%)
* The changes in renewal pricing shown are also reflective of changes in our
exposure base, deductibles, self-insurance retention limits and other policy
terms.
99
Ceded Premiums Written
Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. Through
our current excess of loss reinsurance arrangements we retain the first $1 million in risk insured by us and cede coverages in
excess of this amount. For our medical technology liability coverages, we also retain 20% of the next $9.0 million of risk for
coverages in excess of $1.0 million. We pay our reinsurers a ceding premium in exchange for their accepting the risk, the
ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and
maximum amounts.
Ceded premiums written for the years ended December 31, 2016 and 2015 were as follows:
($ in thousands)
Excess of loss reinsurance arrangements (1)
Premium ceded to Syndicate 1729 (2)
Other shared risk arrangements (3)
Other ceded premiums written
Reduction in premiums owed under reinsurance agreements, prior
accident years, net (4)
Total ceded premiums written
Year Ended December 31
2016
$ 30,037
2015
$ 32,627
23,832
26,737
3,521
24,718
24,401
3,542
Change
$ (2,590)
(886)
2,336
(21)
(7.9%)
(3.6%)
9.6%
(0.6%)
(7,083)
$ 77,044
(1,118)
$ 84,170
(5,965)
$ (7,126)
533.5%
(8.5%)
(1) We generally reinsure risks under our excess of loss reinsurance arrangements pursuant to which the reinsurers
agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the
maximum individual limits offered. The decrease in ceded premiums written under our excess of loss
reinsurance arrangements during 2016 was primarily due to more favorable contract terms on our 2015 core
treaty which renewed in October 2016 with similar terms.
(2) As previously discussed, we are a 58% participant in Syndicate 1729 and record our pro rata share of its
operating results in our Lloyd's Syndicate segment on a quarter delay. We also record the cession within the
Specialty P&C segment on a quarter delay as the amounts are not material and this permits the cession to be
reported by both the Lloyd's Syndicate segment and the Specialty P&C segment in the same reporting period. As
our premiums are earned, we recognize the related ceding commission income which reduces underwriting
expense by offsetting DPAC amortization. The related ceding commission income was approximately 27% of
ceded premiums written. For our consolidated results, eliminations of the inter-segment portion (58% of the
Specialty P&C cession) of the transactions are also recorded on a quarter delay.
(3) We have entered into various shared risk arrangements, including quota share, fronting, and captive
arrangements, with certain large healthcare systems and other insurance entities. While we cede a large portion
of the premium written under these arrangements, they provide us an opportunity to grow net premium through
strategic partnerships. The increase in 2016 was primarily driven by growth in our Ascension Health and
CAPAssurance programs.
(4) Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable
under a reinsurance arrangement are known. As a part of the process of estimating our loss reserve we also make
estimates regarding the amounts recoverable under our reinsurance arrangements. As previously discussed, the
premiums ultimately ceded under our excess of loss reinsurance arrangements are subject to the losses ceded
under the arrangements. In both 2016 and 2015, on a net basis, we reduced our estimate of expected losses and
associated recoveries for prior year ceded losses, as well as our estimate of ceded premiums owed to reinsurers.
Changes to estimates of premiums ceded related to prior accident years are fully earned in the period the changes
in estimates occur.
100
Ceded Premiums Ratio
As shown in the table below, our ceded premiums ratio was affected in both 2016 and 2015 by revisions to our estimate of
premiums owed to reinsurers related to coverages provided in prior accident years.
Ceded premiums ratio, as reported
Less the effect of reduction in premiums owed under reinsurance
agreements, prior accident years (as previously discussed)
Ratio, current accident year
Year Ended December 31
2016
14.4% 16.0%
2015
Change
(1.6) pts
(1.3%)
(0.2%)
15.7% 16.2%
(1.1) pts
(0.5) pts
The decrease in the current accident year ceded premiums ratio for the year ended December 31, 2016 was primarily
attributable to more favorable treaty terms in our excess of loss reinsurance arrangements and the effect of an increase in
premium volume driven by a fourth quarter 2016 novation (as discussed above under the heading "Gross Premiums Written").
This reduction to the ratio was partially offset by an increase in premium ceded under our shared risk arrangements.
Net Premiums Earned
Net premiums earned were as follows:
Year Ended December 31
($ in thousands)
Gross premiums earned
2016
$ 535,931
2015
$ 528,118
Less: Ceded premiums earned
78,115
84,805
Net premiums earned
$ 457,816
$ 443,313
Change
$
7,813
(6,690)
$ 14,503
1.5%
(7.9%)
3.3%
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our
reinsurers for their assumption of a portion of our losses. Because premiums are generally earned pro rata over the entire policy
period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year,
but as discussed above, we write certain policies with a twenty-four month term, and certain of our medical technology liability
policies carry a multi-year term. Tail coverage premiums are generally 100% earned in the period written because the policies
insure only incidents that occurred in prior periods and are not cancellable. Additionally, ceded premium changes due to
changes to estimates of premiums owed under reinsurance agreements for prior accident years are fully earned in the period of
change.
The increase in gross premiums earned in 2016 was driven by a large novation during the fourth quarter 2016, as
discussed above under the heading "Gross Premiums Written", partially offset by the pro rata effect of the lower physician
premiums written during the preceding twelve months. In addition, prior accident year ceded premiums reductions were $6.0
million higher in 2016 than in 2015 (see discussion under the heading "Ceded Premiums Written").
101
Losses and Loss Adjustment Expenses
The determination of calendar year losses involves the actuarial evaluation of incurred losses for the current accident year
and the actuarial re-evaluation of incurred losses for prior accident years, including an evaluation of the reserve amounts
required for losses in excess of policy limits.
Accident year refers to the accounting period in which the insured event becomes a liability of the insurer. For claims-
made policies, which represent over 90% of the premiums written in our Specialty P&C segment, the insured event generally
becomes a liability when the event is first reported to the insurer. For occurrence policies the insured event becomes a liability
when the event takes place. We believe that measuring losses on an accident year basis is the best measure of the underlying
profitability of the premiums earned in that period, since it associates policy premiums earned with the estimate of the losses
incurred related to those policy premiums.
The following table summarizes calendar year net loss ratios by separating losses between the current accident year and
all prior accident years. Additionally, the table shows our current accident year net loss ratio was affected by revisions to our
estimate of premiums owed to reinsurers related to coverages provided in prior accident years. Net loss ratios for 2016 and
2015 compare as follows:
Calendar year net loss ratio
Less impact of prior accident years on the net loss ratio
Current accident year net loss ratio
Less estimated ratio increase (decrease) attributable to:
Ceded premium reductions, prior accident years (2)
Net Loss Ratios (1)
Year Ended December 31
2016
58.7%
(29.9%)
88.6 %
2015
56.4%
(35.9%)
92.3 %
Change
2.3 pts
6.0 pts
(3.7) pts
(1.4%)
(0.2%)
(1.2) pts
Current accident year net loss ratio, excluding the effect of prior
year ceded premium (3)
90.0 %
92.5 %
(2.5) pts
(1) Net losses, as specified, divided by net premiums earned.
(2) Reductions to premiums owed under reinsurance agreements for prior accident years increased net premiums
earned (the denominator of the current accident year ratio) in both 2016 and 2015. See the discussion in the
Premiums section for our Specialty P&C segment under the heading "Ceded Premiums Written" for additional
information.
(3) The decrease in the current accident year net loss ratio primarily reflected changes in expected loss costs related
to mass tort litigation and, to a lesser extent, changes in the mix of business. While we increased our reserves
related to mass tort litigation in both 2016 and 2015 the increase was substantially less in 2016, resulting in
approximately 1.9 percentage points of the decrease. Slightly offsetting the decrease by approximately 0.4
percentage points was the effect of a novation (net premiums earned at a high loss ratio) entered into during the
fourth quarter 2016. Additional information regarding the novation is included in the Premiums section for our
Specialty P&C segment under the heading "Gross Premiums Written."
We recognized net favorable loss development related to our previously established reserve of $137.2 million and $159.0
million for the years ended December 31, 2016 and 2015, respectively. The net favorable loss development in 2016 and 2015
included $12.0 million and $11.8 million, respectively, attributable to our medical technology liability line of business and $9.4
million and $1.0 million, respectively, attributable to our legal professionals liability line of business. We re-evaluate our
previously established reserve each quarter based on our most recently available claims data and currently available industry
trend information. Development recognized during 2016 principally related to accident years 2008 through 2014. Development
recognized during 2015 principally related to accident years 2008 through 2012.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting
Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our
reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are
reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions
can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2016
and 2015.
102
Underwriting, Policy Acquisition and Operating Expenses
Specialty P&C segment Underwriting, policy acquisition and operating expenses for 2016 and 2015 were comprised as
follows:
($ in thousands)
2016
2015
Change
Year Ended December 31
Specialty P&C segment:
DPAC amortization
Management fees
Other underwriting and operating expenses
Total
$
45,019
$
45,459
$
6,447
52,867
104,333
6,931
53,184
105,574
$
$
$
(440)
(484)
(317)
(1,241)
(1.0%)
(7.0%)
(0.6%)
(1.2%)
DPAC amortization decreased $0.4 million in 2016 as compared to 2015. The decrease is primarily due to the effect of a
$1.2 million increase in ceding commission income, which is an offset to expense. Increases in commission expense related to
business written by our independent agents offsets increases in ceding commission income and, for the period, reduced the
increase in ceding commission income almost entirely.
Management fees are charged pursuant to a management agreement by the Corporate segment to the operating
subsidiaries within our Specialty P&C segment for services provided, based on the extent to which services are provided to the
subsidiary and the amount of premium written by the subsidiary. While the terms of the management agreement were
consistent between 2016 and 2015, fluctuations in the amount of premium written by each subsidiary can result in
corresponding variations in the management fee charged to each subsidiary during a particular period.
Other underwriting and operating expenses decreased slightly during 2016 with no individually significant variances by
expense category.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio for the Specialty P&C segment reflects a decrease in 2016 as compared to 2015, as shown
below:
Underwriting expense ratio
Year Ended December 31
2016
22.8%
2015
Change
23.8%
(1.0) pts
The decrease in the underwriting expense ratio for 2016 is primarily reflective of the effect of an increase in net earned
premium, primarily attributable to a fourth quarter 2016 novation (as discussed in the Premiums section for our Specialty P&C
segment under the heading "Gross Premiums Written"), and to a lesser extent by the effect of the previously discussed
reduction in DPAC amortization.
Segregated Portfolio Cell Dividend Expense (Income)
During 2016 we expanded our alternative market solutions by writing HCPL premium in three SPCs at Eastern Re.
Consistent with the SPC structure discussed in our Workers' Compensation segment, the net operating results of each cell, net
of any participation we have taken in the SPCs, are due to the external owners of that cell. Our Specialty P&C segment does
not currently participate in the cells that write HCPL premium, and therefore retains no underwriting profit or loss. SPC
dividend expense (income) was $0.1 million for 2016. There was no SPC dividend expense (income) for Specialty P&C during
2015. See the Underwriting, Policy Acquisition and Operating Expense section in our Workers' Compensation segment results
for more information on our SPCs.
103
Segment Operating Results - Workers' Compensation
Our Workers' Compensation segment provides traditional workers' compensation insurance products to employers with
1,000 or fewer employees and alternative market solutions, as discussed in Note 15 to the Notes to Consolidated Financial
Statements. Segment operating results reflect pre-tax underwriting profit or loss, which includes SPC dividend expense
(income) and excludes investment results which are included in our Corporate segment. Segment operating results included the
following:
($ in thousands)
Net premiums written
Net premiums earned
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Segregated portfolio cells dividend (expense) income (1)
Segment operating results
Year Ended December 31
2016
223,578
220,815
844
(140,534)
(70,464)
(4,762)
5,899
$
$
$
2015
218,338
213,161
492
(140,744)
(63,653)
(1,884)
7,372
$
$
$
$
$
$
Change
5,240
7,654
352
210
(6,811)
(2,878)
(1,473)
2.4%
3.6%
71.5%
(0.1%)
10.7%
152.8%
(20.0%)
Net loss ratio
Traditional business
Alternative market business
Segment results
Underwriting expense ratio
Traditional business
Alternative market business
Segment results
66.5%
55.7%
63.6%
32.2%
31.0%
31.9%
65.5%
67.5%
66.0%
29.4%
31.4%
29.9%
1.0 pts
(11.8) pts
(2.4) pts
2.8 pts
(0.4) pts
2.0 pts
(1) Represents the underwriting (profit) loss attributable to the alternative market business ceded to the SPCs at Eastern Re, net
of our participation.
104
Premiums Written
Our workers’ compensation premium volume is driven by four primary factors: (1) the amount of new business written,
(2) audit premium, (3) retention of our existing book of business, and (4) premium rates charged on our renewal book of
business.
Gross, ceded and net premiums written were as follows:
($ in thousands)
2016
2015
Change
Year Ended December 31
Gross premiums written
Traditional business*
Alternative market business
Segment results
Less: Ceded premiums written
Traditional business
Alternative market business*
Segment results
Net premiums written
Traditional business
Alternative market business
$ 172,025 $ 172,977 $
75,915
70,631
247,940
243,608
9,446
14,916
24,362
10,307
14,963
25,270
(952)
5,284
4,332
(861)
(47)
(908)
162,579
162,670
60,999
55,668
(91)
5,331
Segment results
$ 223,578 $ 218,338 $
5,240
(0.6%)
7.5%
1.8%
(8.4%)
(0.3%)
(3.6%)
(0.1%)
9.6%
2.4%
* Traditional gross premiums written and alternative market ceded premiums written for 2016 are reported
net of alternative market premiums assumed by our traditional business totaling $0.9 million
Our traditional workers’ compensation insurance products include guaranteed cost, dividend, deductible, and
retrospectively-rated policies. Our alternative market business is 100% ceded to either the SPCs at our wholly owned Cayman
Islands reinsurance subsidiary, Eastern Re, or to unaffiliated captive insurers. As of December 31, 2016, there were 23 (20
active) SPCs at Eastern Re and four active alternative market programs with unaffiliated captive insurers. We added a new
alternative market program with an unaffiliated captive insurer during the first quarter of 2016 with direct premiums written of
$1.9 million for the year ended December 31, 2016.
Additional information regarding the structure of the SPCs is included in the Underwriting, Policy Acquisition and
Operating Expense section that follows.
105
Gross Premiums Written
Gross premiums written in our traditional and alternative market business for the years ended December 31, 2016 and
2015 are reflected in the table on the previous page. Gross premiums written increased in 2016, driven by growth in our
alternative market business. Our traditional business premium written was relatively flat in 2016, which reflected the
competitive environment in the geographic markets in which we operate. We retained all 23 of the available alternative market
programs up for renewal for the year ended December 31, 2016.
New business, audit premium, retention and renewal price changes for both the traditional business and the alternative
market business are shown in the table below:
($ in millions)
$
New business
Audit premium (including EBUB) $
Retention rate (1)
Change in renewal pricing (2)
Traditional
Business
22.8
5.2
84 %
(1%)
$
$
Year Ended December 31
2016
Alternative
Market
Business
10.2
1.1
88 %
(1%)
$
$
Segment
Results
33.0
6.3
85 %
(1%)
2015
Alternative
Market
Business
Segment
Results
Traditional
Business
$
$
28.1
5.9
$
$
10.2
0.9
$
$
38.3
6.8
81%
1%
89%
2%
83%
1%
(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium divided by all annualized
expiring premium subject to renewal. Our retention rate can be impacted by various factors, including price or other competitive
issues, insureds being acquired, or a decision not to renew based on our underwriting evaluation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and the effects of current market conditions.
We continue to base our pricing on expected losses, as indicated by our historical loss data. Changes in the renewal rate reflected
the competitive workers' compensation environment.
106
Ceded Premiums Written
Ceded premiums written reflected our external reinsurance programs and alternative market business ceded to unaffiliated
captive insurance companies.
Ceded premiums written were as follows:
($ in thousands)
2016
2015
Change
Year Ended December 31
Premiums ceded to external reinsurers
Traditional business
Alternative market business
Segment results
Change in return premium estimate under external
reinsurance
$ 10,255 $ 9,922 $
7,258
17,513
7,205
17,127
333
53
386
3.4%
0.7%
2.3%
Traditional business
Alternative market business
Segment results
(809)
—
(809)
385
—
385
(1,194) (310.1%)
nm
(1,194) (310.1%)
—
Premiums ceded to an unaffiliated captive insurer
Traditional business
Alternative market business
Segment results
Total ceded premiums written
Traditional business
Alternative market business
Segment results
—
7,658
7,658
—
7,758
7,758
9,446
10,307
14,916
14,963
$ 24,362 $ 25,270 $
—
(100)
(100)
(861)
(47)
(908)
nm
(1.3%)
(1.3%)
(8.4%)
(0.3%)
(3.6%)
We retain the first $0.5 million in risk insured by us on our traditional business and cede losses in excess of this amount
on each loss occurrence under our primary external reinsurance contract. The traditional external reinsurance contract contains
a return premium provision under which we estimate return premium based on the underlying loss experience of policies
covered under the contract. Changes in the return premium estimate reflect the loss experience under the reinsurance contract
for the years ended December 31, 2016 and 2015. In our alternative market business, the risk retention for each loss occurrence
ranges from $0.3 million to $0.35 million based on the alternative market program. We cede 100% of premiums written under
four alternative market programs to unaffiliated captive insurers.
Premiums ceded to external reinsurers in our traditional business increased during the year ended December 31, 2016,
which primarily reflected an increase in reinsurance rates for the contract year effective May 1, 2016.
The increase in the return premium estimate for the year ended December 31, 2016 primarily reflected loss experience
under the current reinsurance contract year effective May 1, 2016. The decrease in the return premium estimate for the year
ended December 31, 2015 primarily reflected 2015 traditional ceded incurred losses as discussed below (including $4.9 million
related to the 2015 accident year), partially offset by favorable loss experience on contract years prior to 2014.
The workers’ compensation segment has experienced an increase in severity related claims, which has resulted in an
increase in losses ceded under our external reinsurance contract. Calendar year ceded incurred losses in both our traditional and
alternative market business totaled $35.6 million for the year ended December 31, 2016 as compared to $12.6 million for 2015.
In our traditional business, ceded incurred losses totaled $20.7 million and $7.9 million for the years ended December 31, 2016
and 2015, respectively. The increase in traditional ceded losses in 2016 primarily reflected 3 loss occurrences totaling $12.4
million. The increase in our traditional reinsurance rate primarily reflected the increase in claim severity. Additionally, we have
not accrued any return premium for the 2014 or 2015 reinsurance contract years as a result of the increase in ceded losses.
The decrease in premiums ceded to unaffiliated captive insurers during the year ended December 31, 2016 primarily
reflected the non-renewal of accounts for underwriting reasons, partially offset by the new alternative market program in the
first quarter of 2016 as discussed above.
107
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Year Ended December 31
2016
Alternative
Market
Business
Traditional
Business
Segment
Results
Traditional
Business
2015
Alternative
Market
Business
Segment
Results
Ceded premiums ratio, as reported
5.5%
19.6%
9.8%
6.0%
21.2%
10.4%
Less the effect of:
Return premium estimated under external
reinsurance
Premiums ceded to unaffiliated captive insurer
(100%)
Ceded premiums ratio, less the effects of above
(0.5%)
—% (0.3%)
0.2%
—%
0.2%
—%
6.0%
9.0%
10.6%
2.9%
7.2%
—%
5.8%
9.7%
11.5%
2.9%
7.3%
Per our reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis,
whereas alternative market premiums are ceded on a written premium basis. The increase in the traditional ceded premiums
ratio, less the effect of return premiums, in 2016 as compared to 2015 reflected the increase in reinsurance rates previously
discussed. The decrease in the alternative markets ceded premiums ratio in 2016 as compared to 2015 primarily reflected the
impact of the premiums ceded to and assumed by the traditional business.
Net Premiums Earned
Net premiums earned were as follows:
($ in thousands)
2016
2015
Change
Year Ended December 31
Gross premiums earned
Traditional business*
Alternative market business
Segment results
Less: Ceded premiums earned
Traditional business
Alternative market business*
Segment results
Net premiums earned
Traditional business
Alternative market business
Segment results
$ 170,492 $ 172,115 $ (1,623)
9,490
66,168
7,867
238,283
75,658
246,150
(0.9%)
14.3%
3.3%
9,446
15,889
25,335
10,859
14,263
25,122
(1,413)
1,626
213
(13.0%)
11.4%
0.8%
161,046
161,256
59,769
51,905
(210)
7,864
$ 220,815 $ 213,161 $
7,654
(0.1%)
15.2%
3.6%
* Traditional gross premiums earned and alternative market ceded premiums earned for 2016 are
reported net of alternative market premiums assumed by our traditional business totaling $0.9
million.
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers
for their assumption of a portion of our losses. Our workers’ compensation policies are twelve month policies and premiums are
earned on a pro rata basis over the policy period. Net premiums earned also include premium adjustments related to the audit of
our insureds' payrolls. Payroll audits are conducted subsequent to the end of the policy period and any related adjustments are
recorded as fully earned in the current period. In addition, we record an estimate for EBUB and evaluate the estimate on a
quarterly basis. We increased the EBUB estimate by $0.4 million and $0.5 million for the years ended December 31, 2016 and
2015, respectively.
108
Losses and Loss Adjustment Expenses
The following table summarizes calendar year net loss ratios by separating losses between the current accident year and
all prior accident years. Calendar year net loss ratios by component were as follows:
Net Loss Ratios
Year Ended December 31
2016
Traditional
Business
Alternative
Market
Segment
Business
Results
66.5% 55.7% 63.6%
2015
Alternative
Market
Business
Segment
Results
Traditional
Business
65.5% 67.5% 66.0%
Change
Alternative
Market
Business
Segment
Results
(11.8)
(2.4)
Traditional
Business
1.0
(1.0%)
(7.8%)
(2.8%)
(1.0%)
(1.2%)
(1.1%)
67.5% 63.5% 66.4%
66.5% 68.7% 67.1%
—% (1.2%)
(0.3%)
—%
(1.2%)
(0.3%)
—
1.0
—
(6.6)
(1.7)
(5.2)
(0.7)
—
—
67.5% 64.7% 66.7%
66.5% 69.9% 67.4%
1.0
(5.2)
(0.7)
Calendar year net loss ratio *
Less impact of prior accident
years on the net loss ratio
Current accident year net
loss ratio
Less impact of audit
premium on loss ratio
Current accident year net
loss ratio, excluding the
effect of audit and return
premium
* The net loss ratios for 2016 in the above table are calculated before the impact of the $0.9 million of premiums earned that is assumed by
and ceded from the traditional and alternative market business, respectively.
The current accident year net loss ratio in our traditional business increased in 2016 as compared to 2015 which primarily
reflected the expected impact of renewal rate decreases in 2016. The decrease in the current accident year net loss ratio in our
alternative market business primarily reflected improved loss experience and a decrease in severity-related claims activity.
We recognized net favorable prior year development related to our previously established reserve of $6.1 million and $2.2
million for the years ended December 31, 2016 and 2015, respectively. The net favorable prior year development included $1.6
million related to amortization of the purchase accounting fair value adjustment for our traditional business for both 2016 and
2015. It also included net favorable prior year development for our alternative market business of $4.5 million and $0.6 million
for the years ended December 31, 2016 and 2015, respectively.
Within our alternative market business, audit premium from insureds results in a decrease in the net loss ratio, whereas
audit premium returned to insureds results in an increase in the net loss ratio. We recognized audit premium in 2016 and 2015,
the effect of which is reflected in the table above.
In our traditional business, we estimate our current accident year loss and loss adjustment expenses based on an expected
loss ratio. Incurred losses and loss adjustment expenses are determined by applying the expected loss ratio to net premiums
earned, which includes audit premium, for the respective period. In our alternative market business, we estimate our current
accident year losses and loss adjustment expenses based on the underlying actuarial methodologies without consideration of
audit premium. As a result, we removed the effects of audit premium in the above table for purposes of evaluating the current
accident year loss ratio.
109
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses include commissions, premium taxes and underwriting salaries,
which are capitalized and deferred over the related workers’ compensation policy period, net of external ceding commissions
earned. The capitalization of these costs can vary as they are subject to the success rate of our contract acquisition efforts.
These expenses also include a management fee charged by the Corporate segment, which represents intercompany charges
pursuant to a management agreement. The fee is based on the extent to which services are provided to the subsidiary and the
amount of premium written by the subsidiary.
The table below provides a comparison of underwriting, policy acquisition and operating expenses:
($ in thousands)
Traditional business
Alternative market business
Underwriting, policy acquisition
and operating expenses
Year Ended December 31
$
2016
52,207 $
18,257
2015
47,343 $
16,310
Change
4,864
1,947
10.3%
11.9%
$
70,464 $
63,653 $
6,811
10.7%
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio for the Worker's Compensation segment included the impact of the following:
Year Ended December 31
2016
Alternative
Market
Business
Traditional
Business
Segment
Results
Traditional
Business
2015
Alternative
Market
Business
Segment
Results
Traditional
Business
Change
Alternative
Market
Business
Segment
Results
32.2%
31.0% 31.9%
29.4%
31.4% 29.9%
2.8
(0.4)
2.0
Underwriting expense ratio, as
reported*
Less estimated ratio increase
(decrease) attributable to:
Non-recurring/unusual
expenses
Amortization of intangible
assets
Management fees
0.6%
—% 0.4%
—%
—%
—%
3.2%
1.1%
—% 2.4%
—% 0.8%
3.2%
1.1%
—%
—%
2.4%
0.9%
0.6
—
—
—
—
—
—
(0.1)
0.4
—
(0.1)
0.1
Impact of audit premium
(0.9%)
(0.6%)
(0.8%)
(0.9%)
(0.5%)
(0.9%)
Impact of return premium
estimate
Underwriting expense ratio,
less listed effects
(0.1%)
—% (0.1%)
0.1%
—%
0.1%
(0.2)
—
(0.2)
28.3%
31.6% 29.2%
25.9%
31.9% 27.4%
2.4
(0.3)
1.8
* The underwriting expense ratios for 2016 in the above table are calculated before the impact of the $0.9 million of premiums earned that is
assumed by and ceded from the traditional and alternative market business, respectively.
Non-recurring expenses for the year ended December 31, 2016 in the above table reflected a pension settlement charge of
$1.0 million related to the termination of a legacy Eastern pension plan which was finalized during the fourth quarter of 2016.
The remaining increase in the traditional expense ratio in 2016, exclusive of the items noted in the table, primarily
reflected increases in compensation and related benefits and state assessments, as well as the effect of the decrease in net
premiums earned. The alternative markets expense ratio primarily reflected ceding commissions, which vary by program.
110
Segregated Portfolio Cell Dividend Expense (Income)
Our Workers' Compensation segment provides turn-key workers' compensation alternative market solutions that include
program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management
services. The asset management and SPC management services are outsourced to a third party. Alternative market customers
include individual companies, groups and associations. SPC dividend expense (income) for each period represents the profit or
loss attributable to the alternative market business ceded to the SPCs of Eastern Re, net of any participation we have taken in
the SPCs.
The SPCs are segregated pools of assets and liabilities that provide an insurance facility for a defined set of risks. Assets
of each SPC are solely for the benefit of that individual cell and each SPC is solely responsible for the liabilities of that
individual cell. Assets of each SPC are statutorily protected from the creditors of the others. We participate to a varying degree
in the results of selected SPCs. Our ownership interest in the SPCs in which we participate is as low as 25% and as high as
100%. Under the SPC structure, the net operating results of each cell, net of our participation, are due to the external owners of
that cell.
SPC dividend expense (income) was as follows:
($ in thousands)
Net premiums earned
Other income
Less: Net losses and loss adjustment expenses
Less: Underwriting, policy acquisition and operating
expenses
SPC net operating results - profit/(loss)
Less: Eastern participation - profit/(loss)
SPC dividend expense (income)
Year Ended December 31
2016
58,826 $
18
2015
51,905 $
3
32,743
35,059
Change
6,921
15
(2,316)
13.3%
500.0%
(6.6%)
18,258
7,843
3,081
4,762 $
16,310
539
(1,345)
1,884 $
1,948
7,304
4,426
2,878
11.9%
1,355.1%
329.1%
152.8%
$
$
The increase in SPC dividend expense (income), including our participation, in 2016 reflected improved underwriting and
investment results related to the SPCs at Eastern Re. The improved underwriting results were driven by improved loss
experience. The SPC investment results, which are reported in our Corporate segment as discussed at the beginning of the
Segment Operating Results - Workers' Compensation section, reflected income of $3.2 million in 2016, compared to losses of
$1.0 million in 2015.
111
Segment Operating Results - Lloyd's Syndicate
Through a wholly owned and consolidated subsidiary, we are a corporate member of Lloyd's of London and have
provided the majority (58%) of the capital to Syndicate 1729 which writes and reinsures property and casualty business. The
remaining capital for Syndicate 1729 is provided by unrelated third parties, including private names and other corporate
members.
Syndicate 1729 covers a range of property and casualty insurance and reinsurance lines, and had a maximum
underwriting capacity of £90.0 million for the 2016 underwriting year, of which £51.8 million ($63.9 million based on
December 31, 2016 exchange rates) is our allocated underwriting capacity. We are required to provide capital (also referred to
as FAL) to support our underwriting capacity and are meeting our FAL requirement with investment securities held at Lloyd's.
Our FAL securities had a fair value of $97.1 million at December 31, 2016, as discussed in Note 4 of the Notes to Consolidated
Financial Statements.
Our Lloyd's Syndicate segment results include both our 58% participation in the operating results of Syndicate 1729 and
100% of the operating results of our wholly owned subsidiaries that support Syndicate 1729. We report results from our
Syndicate 1729 involvement on a quarter delay, except that investment results associated with our FAL investments and certain
U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame.
Segment operating results were composed as follows:
($ in thousands)
Gross premiums written
Ceded premiums written
Net premiums written
Net premiums earned
Net investment income
Net realized gains (losses)
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Income tax benefit (expense)
Segment operating results
Net loss ratio
Underwriting expense ratio
Premiums Written
Year Ended December 31
$
$
$
$
$
$
2016
65,157
(8,883)
56,274
54,650
1,410
76
1,415
(34,116)
(22,832)
(384)
$
219
$
$
$
$
2015
56,929
(8,108)
48,821
37,675
928
24
698
(25,181)
(18,518)
(1,240)
(5,614) $
Change
8,228
(775)
7,453
16,975
482
52
717
(8,935)
(4,314)
856
5,833
14.5%
9.6%
15.3%
45.1%
51.9%
216.7%
102.7%
35.5%
23.3%
(69.0%)
103.9%
62.4%
41.8%
66.8%
49.2%
(4.4) pts
(7.4) pts
Gross premiums written in 2016 consisted of casualty coverages (53% of total gross written premium), property insurance
coverages (28%), catastrophe reinsurance coverages (15%), and property reinsurance coverages (4%). The increase in net
premiums written during 2016 was attributable to new business.
As discussed in our Specialty P&C segment operating results, Syndicate 1729 serves as a reinsurer on a quota share basis
for a wholly owned insurance subsidiary in our Specialty P&C segment. For premium assumed, we include in written premium
an estimate of all premiums to be earned over the entire period covered by the reinsurance agreement, generally one year, in the
quarter in which the reinsurance agreement becomes effective. The quota share agreement with our Specialty P&C segment
renews effective January 1. Results from this ceding arrangement are reported in the Specialty P&C segment on the same
quarter delay in order to be consistent with the Lloyd's Syndicate segment as the effect of doing so is not material.
The 2014 calendar year quota share arrangement with our Specialty P&C segment was commuted in December 2015.
Due to the reporting delay, the effect of the commutation was reported by both segments in results during the first quarter 2016.
The commutation did not differ significantly from previously recorded amounts.
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers
for their assumption of a portion of our losses. Policies written to date primarily carry a term of one year. Because premiums
are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums
112
written. Additionally, premiums for certain policies and assumed reinsurance contracts are reported subsequent to the coverage
period and/or may be subject to adjustment based on loss experience. These premium adjustments are earned when reported,
which can result in further fluctuation in earned premium. Net premiums earned reported included premium assumed from our
Specialty P&C segment of approximately $14.0 million for 2016 and $14.4 million for 2015.
Net Losses and Loss Adjustment Expenses
Losses for the year were primarily recorded using the loss assumptions by risk category incorporated into the business
plan submitted to Lloyd's for Syndicate 1729 with consideration given to loss experience incurred to date. The assumptions
used in the business plan were consistent with loss results reflected in Lloyd's historical data for similar risks. We expect loss
ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the book begins to mature. The loss ratios
will also fluctuate due to the timing of earned premium adjustments described above. Premium and exposure for some of
Syndicate 1729's insurance policies and reinsurance contracts are initially estimated and subsequently adjusted over an
extended period of time as reports are received under binding authority programs. When reports are received, the premium,
exposure and corresponding loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure
fluctuations are incurred in the accident year in which the premium is earned.
The 4.4% decrease in the net loss ratio for 2016 as compared to 2015 reflected the recognition of $0.5 million in net
favorable prior year development and reductions attributable to shifts in the mix of business as well as increased reliance on the
actual loss experience on the book of business written by Syndicate 1729. We believe that the net amount of favorable prior
year development recognized during 2016 accurately reflects losses on this book of business by accident year. We did not
recognize any prior year development in 2015.
Underwriting, Policy Acquisition and Operating Expenses
Underwriting expenses increased $4.3 million during 2016 when compared to 2015 primarily related to a $5.9 million
increase in DPAC amortization. As operations have matured, the total amount of underwriting salaries has increased along with
the number of policies successfully written. Underwriting compensation is capitalized as DPAC only when efforts are
successful and amounts capitalized in 2016 were greater than in 2015. During 2014, the initial year of operations, no
underwriting salaries were capitalized as DPAC, as there was no established success rate. The first quarter 2015 reflected
results from 2014 due to the delay in reporting. Consequently, DPAC amortization was greater in 2016 than in 2015 but
underwriting compensation charged directly to expense was lower in 2016 than in 2015. Also, certain startup expenses were
incurred in 2015. The improvement in the 2016 expense ratio primarily reflected the increase in net premiums earned and we
anticipate a continued reduction to the ratio as the level of net premiums earned is expected to continue to grow.
Net Investment Income
Net investment income for the years ended December 31, 2016 and 2015 was primarily attributable to interest earned on
the FAL investments. Our FAL investments are primarily short-term investments and investment-grade corporate debt
securities.
Taxes
Operating results of this segment are subject to U.K. income tax law. During the fourth quarter of 2016, we recognized a
$3.0 million tax benefit, which reversed taxes accrued in previous quarters of 2016. The benefit is a result of a current period
change in the calculation of the currency exchange gains and losses on our Syndicate 1729’s investments for U.K. tax purposes,
which are primarily denominated in U.S. dollars.
113
Segment Operating Results - Corporate
Our Corporate segment includes investment operations, interest expense and U.S. income taxes, all of which are managed
at the corporate level with the exception of investment assets solely allocated to Syndicate 1729 as discussed in Note 15 of the
Notes to Consolidated Financial Statements. Our Corporate segment operating results also reflect non-premium revenues
generated outside of our insurance entities and corporate expenses. Segment operating results for our Corporate segment were
net earnings of $58.1 million and $21.3 million for the years ended December 31, 2016 and 2015, respectively, and included
the following:
Year Ended December 31
Net investment income
($ in thousands)
Equity in earnings (loss) of unconsolidated subsidiaries
Net realized gains (losses)
Operating expense
Segregated portfolio cells dividend expense (income) (1)
Interest expense
Income tax expense (benefit)
2016
$ 98,602
$ (5,762) $
$ 34,799
$ 30,807
2015
Change
3,682
$ 107,732
$ (9,130)
$ (9,444)
$ (41,663) $ 76,462
6,289
$ 24,518
$
(8.5%)
(256.5%)
183.5%
25.7%
$
3,236
$
1,031
$ 15,032
$ 14,596
$
$
2,205
213.9%
436
3.0%
$ 24,736
$ 11,418
$ 13,318
116.6%
(1) Represents the investment results attributable to the SPCs at Eastern Re
Net Investment Income, Equity in Earnings (Loss) of Unconsolidated Subsidiaries, Net Realized Investment Gains
(Losses)
Net Investment Income
Net investment income is primarily derived from the income earned by our fixed maturity securities and also includes
dividend income from equity securities, income from our short-term and cash equivalent investments, earnings from other
investments and increases in the cash surrender value of BOLI contracts. Investment fees and expenses are deducted from
investment income.
Net investment income by investment category was as follows:
($ in thousands)
Fixed maturities
Equities
Other investments, including Short-term
BOLI
Investment fees and expenses
Net investment income
Year Ended December 31
2016
$ 84,386
2015
$ 96,315
14,887
3,353
13,317
2,035
2,008
(6,032)
$ 98,602
2,053
(5,988)
$ 107,732
Change
$ (11,929)
1,570
1,318
(45)
(44)
$ (9,130)
(12.4%)
11.8%
64.8%
(2.2%)
0.7%
(8.5%)
Fixed Maturities
The decrease in our income from fixed maturity securities was due to lower average investment balances and to lower
yields. We reduced the size of our fixed portfolio over the last year in order to pay dividends and invest in other asset classes.
On an overall basis, our average investment in fixed securities was approximately 8.0% lower in 2016 as compared to 2015.
Average yields for our fixed maturity portfolio were as follows:
Average income yield
Average tax equivalent income yield
Year Ended December 31
2016
3.3%
3.8%
2015
3.4%
4.0%
114
Equities
Income from our equity portfolio increased for the year ended December 31, 2016, as compared to 2015 reflecting an
increase in our allocation to this asset category as well as a different mix of equities owned.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries is derived from our investment interests accounted for under the
equity method. Results were as follows:
Investment LPs/LLCs
($ in thousands)
Tax credit partnerships
Equity in earnings (loss) of unconsolidated subsidiaries $ (5,762) $
2016
$ 19,055
(24,817)
Year Ended December 31
2015
Change
$ 13,970
(10,288)
3,682
$
5,085
(14,529)
$ (9,444)
36.4%
141.2%
(256.5%)
We hold interests in certain LPs/LLCs that generate earnings from trading portfolios, secured debt, debt securities, multi-
strategy funds and private equity investments. The performance of the LPs is affected by the volatility of equity and credit
markets.
Our tax credit investments are designed to generate returns in the form of tax credits and tax-deductible project operating
losses and are comprised of qualified affordable housing project tax credit partnership interests and historic tax credit
partnership interests. We account for our tax credit investments under the equity method and record our allocable portion of the
operating losses of the underlying properties based on estimates provided by the partnerships. For our qualified affordable
housing project tax credit partnership interests we adjust our estimates of our allocable portion of operating losses periodically
as actual operating results of the underlying properties become available. During 2016, based on operating results received, we
increased our estimate of partnership operating losses by $8.6 million. The increase represented an acceleration of operating
losses; total operating losses expected over the life of the partnership did not change. The remaining increase during the period
was primarily attributable to operating losses related to our historic tax credit interests, which we began investing in during
2015. Due to the short-term nature of these investments, remaining operating losses are expected to be recognized primarily
during 2017.
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above,
reduced our tax expenses in 2016 and 2015 as follows:
(In millions)
Tax credits recognized during the period
Tax benefit of tax credit partnership operating losses
Year Ended December 31
2016
2015
$
$
27.5
8.7
$
$
22.4
3.6
Tax credits provided by the underlying projects of the historic tax credit partnerships are typically available in the tax
year in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax
credit partnerships are provided over approximately a ten year period. The increase in tax credits recognized in 2016 was
primarily attributable to our historic tax credit partnership investments.
115
Non-GAAP Financial Measure – Tax Equivalent Investment Result
We believe that to fully understand our investment returns it is important to consider the current tax benefits associated
with certain investments as the tax benefit received represents a portion of the return provided by our tax-exempt bonds, BOLI,
common and preferred stocks, and tax credit partnership investments (our tax-preferred investments). We impute a pro forma
tax-equivalent result by estimating the amount of fully-taxable income needed to achieve the same after-tax result as is
currently provided by our tax-preferred investments. We believe this better reflects the economics behind our decision to invest
in certain asset classes that are either taxed at lower rates and/or result in reductions to our current federal income tax expense.
Our pro forma tax-equivalent investment result is shown in the table that follows as is a reconciliation of our GAAP net
investment result to our tax equivalent result.
(In thousands)
GAAP net investment result:
Net investment income
Equity in earnings (loss) of unconsolidated subsidiaries
GAAP net investment result
Year Ended December 31
2016
2015
$ 98,602
(5,762)
$ 92,840
$ 107,732
3,682
$ 111,414
Pro forma tax-equivalent investment result
$ 149,959
$ 164,756
Reconciliation of pro forma and GAAP tax-equivalent
investment result:
GAAP net investment result
Taxable equivalent adjustments, calculated using the 35%
federal statutory tax rate:
State and municipal bonds
BOLI
Dividends received
Tax credit partnerships
Pro forma tax-equivalent investment result
$ 92,840
$ 111,414
11,698
14,449
1,081
1,957
1,105
3,316
42,383
34,472
$ 149,959
$ 164,756
116
Net Realized Investment Gains (Losses)
The following table provides detailed information regarding our net realized investment gains (losses).
(In thousands)
Year Ended December 31
2016
2015
OTTI losses, total:
State and municipal bonds
Corporate debt
Other investments
Portion recognized in OCI:
Corporate debt
Net impairments recognized in earnings
Gross realized gains, available-for-sale securities
Gross realized (losses), available-for-sale securities
Net realized gains (losses), trading securities
Net realized gains (losses), other investments
Change in unrealized holding gains (losses), trading securities
Change in unrealized holding gains (losses), convertible securities, carried at fair
value as a part of Other investments
Other
$
(100) $
(7,604)
(3,130)
1,068
(9,766)
12,402
(7,029)
6,632
1,115
30,521
899
25
—
(11,781)
(8,136)
4,572
(15,345)
11,910
(11,479)
1,080
464
(28,343)
(896)
946
$ (41,663)
Net realized investment gains (losses)
$
34,799
During 2016, we recognized OTTI in earnings of $6.5 million related to corporate bonds, including credit-related OTTI
of $5.5 million related to debt instruments from ten issuers in the energy sector. The fair value of these bonds declined during
2016 as did the credit quality of the issuers, and we recognized credit-related OTTI to reduce the amortized cost basis of the
bonds to the present value of future cash flows we expected to receive from the bonds. During 2016, we also recognized non-
credit impairments of $0.9 million in OCI relative to the bonds of these issuers, as the fair value of the bonds was less than the
present value of the expected future cash flows from the securities.
During 2015, we recognized OTTI in earnings of $7.2 million related to corporate bonds, including credit-related OTTI
of $4.9 million related to debt instruments from six issuers in the energy sector. The fair value of these bonds declined in 2015
as did the credit quality of the issuers and we recognized credit-related OTTI to reduce the amortized cost basis of the bonds to
the present value of future cash flows we expected to receive from the bonds. We also recognized non-credit impairments of
$3.7 million in OCI relative to the bonds of these issuers, as the fair value of the bonds was less than the present value of the
expected future cash flows from the securities. We also recognized an OTTI in earnings during 2015 of $0.9 million related to a
bond we intended to sell.
We recognized a $3.1 million and an $8.1 million OTTI in earnings during 2016 and 2015 related to our interest in an
investment fund that is accounted for using the cost method (classified as part of other investments). The fund is focused on the
energy sector and securities held by the fund declined in value during both 2016 and 2015. OTTI was recognized to reduce our
carrying value of the investment to the NAV reported by the fund.
During 2015 we recognized net losses relative to our trading securities primarily due to reductions in market valuations
during the period.
117
Operating Expenses
Corporate segment operating expenses for the years ended December 31, 2016 and 2015, respectively, were comprised as
follows:
($ in thousands)
Operating expenses
Management fee offset
Segment Total
2016
$ 45,116
(14,309)
$ 30,807
Year Ended December 31
2015
Change
$ 38,646
(14,128)
$ 24,518
$
$
6,470
(181)
6,289
16.7%
1.3%
25.7%
The increase in operating expenses was due to costs incurred in 2016 related to a pre-acquisition liability from a
discontinued operation as well as an increase in salary and benefit expenses primarily related to an increase in share-based
compensation expenses. Increases in share-based compensation expenses primarily resulted from an adjustment of the
projected award value based upon the improvement, in the period, of one of the performance metrics associated with a
particular year's award.
Operating subsidiaries within our Specialty P&C and Workers' Compensation segments are charged a management fee by
the Corporate segment for services provided to these subsidiaries. The management fee is based on the extent to which services
are provided to the subsidiary and the amount of premium written by the subsidiary. Under the arrangement, the expenses
associated with such services are reported as expenses of the Corporate segment, and the management fees charged are reported
as an offset to Corporate operating expenses. While the terms of the management arrangement were consistent between 2015
and 2016, fluctuations in the amount of premium written by each subsidiary can result in corresponding variations in the
management fee charged to each subsidiary during a particular period.
Interest Expense
Interest expense increased during 2016 as compared to 2015 primarily due to an increase in the average interest rate on
the outstanding borrowings under our Revolving Credit Agreement. Our weighted average outstanding debt approximated $351
million for the year ended December 31, 2016 as compared to $348 million for the year ended December 31, 2015.
Interest expense for 2016 and 2015 is provided in the following table:
Senior Notes due 2023
(In thousands)
Year Ended December 31
2016
$ 13,429
2015
$ 13,428
$
Change
1
Revolving Credit Agreement (including fees and amortization)
1,564
1,130
Other
39
$ 15,032
38
$ 14,596
$
434
1
436
—%
38.4%
2.6%
3.0%
118
Taxes
Tax expense allocated to our Corporate segment includes U.S. tax only, which would include U.S. tax expense incurred
from our corporate membership in Lloyd's of London. The U.K. tax expense incurred by the U.K. based subsidiaries of our
Lloyd's Syndicate segment is allocated to that segment. Consolidated tax expense reflects tax expense of both segments, shown
in the table below:
(In thousands)
Corporate segment income tax expense (benefit)
Lloyd's Syndicate segment income tax expense (benefit)
Consolidated income tax expense (benefit)
Year Ended
December 31
2016
24,736
384
25,120
$
$
2015
11,418
1,240
12,658
$
$
Factors affecting our consolidated effective tax rate include the following:
Statutory rate
Tax-exempt income*
Tax credits
Non-U.S. operating results
Other
Effective tax rate
Year Ended
December 31
2016
35.0%
(5.6%)
(15.6%)
(1.0%)
1.5%
14.3%
2015
35.0%
(10.0%)
(17.4%)
0.6%
1.6%
9.8%
* Includes tax-exempt interest, dividends received deduction and change in cash
surrender value of BOLI.
Our effective tax rates for both 2016 and 2015 were different from the statutory federal income tax rate primarily due to
the following:
• A portion of our investment income was tax-exempt.
• We utilized tax credits transferred to us from our tax credit partnership investments.
• We did not recognize U.S. or U.K. tax expense relative to our pro rata portion of the operating profits of Syndicate
1729 in 2016 as we were able to utilize Syndicate 1729 operating losses from prior years as an offset. We did not
recognize a tax benefit for our U.K.operating losses in 2015 as no tax benefit was currently available and it was
not more likely than not that a future benefit would be realized.
Tax credits reduced the effective tax rate for 2016, as in 2015, although the effect decreased in 2016 due to higher pre-tax
income. Tax credits for 2016 were $27.5 million as compared to $22.4 million for 2015.
119
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe that we are principally exposed to three types of market risk related to our investment operations. These risks
are interest rate risk, credit risk and equity price risk. We are also exposed to interest rate risk related to our variable rate
Mortgage Loans and Revolving Credit Agreement. We have limited exposure to foreign currency risk as we issue few insurance
contracts denominated in currencies other than the U.S. dollar and we have few monetary assets or obligations denominated in
foreign currencies.
Interest Rate Risk
Investments
Our fixed maturities portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the
market valuation of these securities. As interest rates rise, market values of fixed income portfolios fall and vice versa. Certain
of the securities are held in an unrealized loss position; we do not intend to sell and believe we will not be required to sell any
of the debt securities held in an unrealized loss position before its anticipated recovery.
The following tables summarize estimated changes in the fair value of our available-for-sale fixed maturity securities for
specific hypothetical changes in interest rates by asset class at December 31, 2017 and December 31, 2016. There are
principally two factors that determine interest rates on a given security: market interest rates and credit spreads. As different
asset classes can be affected in different ways by movements in those two factors, we have broken out our portfolio by asset
class in the following tables.
($ in millions)
(200)
(100)
Current
100
200
Interest Rate Shift in Basis Points
December 31, 2017
Fair Value:
Fixed maturity securities:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
All fixed maturity securities
$
$
142
22
683
1,249
341
2,437
$
$
138
21
657
1,208
335
2,359
$
$
134
21
632
1,167
326
2,280
$
$
130
20
609
1,128
315
2,202
$
$
Duration:
Fixed maturity securities:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
All fixed maturity securities
3.11
1.38
3.83
3.37
1.72
3.23
3.02
1.34
3.79
3.33
2.21
3.26
2.94
3.59
3.78
3.38
3.15
3.43
2.86
4.58
3.80
3.38
3.89
3.55
126
19
585
1,090
302
2,122
2.79
4.87
3.85
3.34
4.24
3.59
120
Interest Rate Shift in Basis Points
December 31, 2016
Fair Value:
($ in millions)
(200)
(100)
Current
100
200
U.S. Treasury obligations
$
155
$
151
$
147
$
142
$
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
31
865
1,365
373
31
832
1,321
368
30
800
1,279
357
29
770
1,238
344
138
29
740
1,198
331
All fixed maturity securities
$
2,789
$
2,703
$
2,613
$
2,523
$
2,436
Duration:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
All fixed maturity securities
3.00
1.55
3.85
3.21
1.75
3.18
2.93
1.70
3.82
3.20
2.48
3.26
2.85
2.39
3.83
3.22
3.38
3.40
2.78
2.67
3.87
3.22
3.86
3.47
2.72
2.70
3.91
3.18
4.10
3.49
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including
the maintenance of the existing level and composition of fixed income security assets, and should not be relied on as indicative
of future results.
Certain shortcomings are inherent in the method of analysis presented in the computation of the fair value of fixed rate
instruments. Actual values may differ from the projections presented should market conditions vary from assumptions used in
the calculation of the fair value of individual securities, including non-parallel shifts in the term structure of interest rates and
changing individual issuer credit spreads.
Our cash and short-term investment portfolio at December 31, 2017 was carried on a cost basis which approximates its
fair value. Our cash and short-term investment portfolio lacks significant interest rate sensitivity due to its short duration.
Debt
Our variable interest rate Mortgage Loans are exposed to interest rate risk. However, a 100 basis point change in LIBOR
will not materially impact our annualized interest expense. Additionally, we have economically hedged the risk of a change in
interest rates in excess of 100 basis points on the Mortgage Loans through the purchase of an interest rate cap derivative
instrument, which effectively caps our annual interest rate on the Mortgage Loans at a maximum of 367.5 basis points (see
Note 10 of the Notes to Consolidated Financial Statements for additional information). The fair value of the interest rate cap is
not materially impacted by a 100 basis point change in LIBOR, however, the carrying value of the interest rate cap is impacted
by future expectations for LIBOR as well as estimations of volatility in the future yield curve.
Our Revolving Credit Agreement is exposed to interest rate risk as it is LIBOR based and a 100 basis point change in
LIBOR will impact annual interest expense only to the extent that there is an outstanding balance. For every $100 million
drawn on our Revolving Credit Agreement, a 100 basis point change in interest rates will change our annual interest expense by
$1 million. Any outstanding balances on the Revolving Credit Agreement can be repaid on each maturity date, which has
typically ranged from one to three months.
Credit Risk
We have exposure to credit risk primarily as a holder of fixed income securities. We control this exposure by emphasizing
investment grade credit quality in the fixed income securities we purchase.
As of December 31, 2017, 93% of our fixed maturity securities were rated investment grade as determined by NRSROs,
such as Fitch, Moody’s and Standard & Poor’s. We believe that this concentration in investment grade securities reduces our
exposure to credit risk on our fixed income investments to an acceptable level. However, investment grade securities, in spite of
their rating, can rapidly deteriorate and result in significant losses. Ratings published by the NRSROs are one of the tools used
to evaluate the credit worthiness of our securities. The ratings reflect the subjective opinion of the rating agencies as to the
credit worthiness of the securities, and therefore, we may be subject to additional credit exposure should the rating prove to be
unreliable.
121
We also have exposure to credit risk related to our receivables from reinsurers. Our receivables from reinsurers (with
regard to both paid and unpaid losses) approximated $343 million at December 31, 2017 and $279 million at December 31,
2016. We monitor the credit risk associated with our reinsurers using publicly available financial and rating agency data.
Equity Price Risk
At December 31, 2017, the fair value of our equity investments, excluding our equity investments in bond investment
funds as discussed in the following paragraph, was $314 million. These equity securities are subject to equity price risk, which
is defined as the potential for loss in fair value due to a decline in equity prices. The weighted average beta of this group of
securities was 1.00. Beta measures the price sensitivity of an equity security or group of equity securities to a change in the
broader equity market, in this case the S&P 500 Index. If the value of the S&P 500 Index increased by 10%, the fair value of
these securities would be expected to increase by 10.0% to $345 million. Conversely, a 10% decrease in the S&P 500 Index
would imply a decrease of 10.0% in the fair value of these securities to $283 million. The selected hypothetical changes of plus
or minus 10% do not reflect what could be considered the best or worst case scenarios and are used for illustrative purposes
only.
Our equity investments include equity investments in certain bond investment funds which are not significantly subject to
equity price risk, and thus we have excluded these investments from the above analysis.
122
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2017 and December 31, 2016
Consolidated Statements of Changes in Capital - Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 2017, 2016
and 2015
Consolidated Statements of Cash Flows - Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
128
129
130
131
132
134
The Supplementary Financial Information required by Item 302 of Regulation S-K is included in Note 18 of the Notes to
Consolidated Financial Statements of ProAssurance and its subsidiaries.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief
Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the fiscal year ended December 31, 2017. Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these controls and procedures are effective.
Disclosure controls and procedures are defined in Exchange Act Rule 13a-15(e) and include the Company’s controls and
other procedures that are designed to ensure that information, required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act, is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as
such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2017 based on the framework in Internal
Control–Integrated Framework issued by the COSO (2013 Framework). Based on that evaluation, our management concluded
that our internal control over financial reporting was effective as of December 31, 2017 and that there was no change in the
Company's internal controls during the fiscal year then ended that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
Ernst & Young LLP, an independent registered public accounting firm, has audited the effectiveness of our internal
controls over financial reporting as of December 31, 2017 as stated in their report which is included elsewhere herein.
ITEM 9B. OTHER INFORMATION
None.
123
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of ProAssurance Corporation
Opinion on Internal Control over Financial Reporting
We have audited ProAssurance Corporation and subsidiaries’ (the Company) internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, ProAssurance
Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets, the related consolidated statements of changes of capital, income and
comprehensive income, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes
and financial statement schedules listed in the Index at Item 15(a) (collectively referred to as the “financial statements”) of the
Company and our report dated February 21, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Birmingham, Alabama
February 21, 2018
124
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE REGISTRANT.
The information required by this Item regarding executive officers is included in Part I of the Form 10-K in accordance
with Instruction 3 of the Instructions to Paragraph (b) of Item 401 of Regulation S-K.
The information required by this Item regarding directors is incorporated by reference pursuant to General Instruction G
(3) of Form 10-K from ProAssurance’s definitive proxy statement for the 2018 Annual Meeting of its Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A on or about April 14, 2018.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference pursuant to General Instruction G (3) of Form 10-K
from ProAssurance’s definitive proxy statement for the 2018 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 14, 2018.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by this Item is incorporated by reference pursuant to General Instruction G (3) of Form 10-K
from ProAssurance’s definitive proxy statement for the 2018 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 14, 2018.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference pursuant to General Instruction G (3) of Form 10-K
from ProAssurance’s definitive proxy statement for the 2018 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 14, 2018.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference pursuant to General Instruction G (3) of Form 10-K
from ProAssurance’s definitive proxy statement for the 2018 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 14, 2018.
125
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements. The following consolidated financial statements of ProAssurance Corporation and subsidiaries
are included herein in accordance with Item 8 of Part II of this report.
Report of Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2017 and 2016
Consolidated Statements of Changes in Capital – years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Income and Comprehensive Income – years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows – years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Financial Statement Schedules. The following consolidated financial statement schedules of ProAssurance Corporation
and subsidiaries are included herein in accordance with Item 14(d):
Schedule I – Summary of Investments – Other than Investments in Related Parties
Schedule II – Condensed Financial Information of ProAssurance Corporation (Registrant Only)
Schedule III – Supplementary Insurance Information
Schedule IV – Reinsurance
All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not
required under the related instructions or are inapplicable and therefore have been omitted.
(b) The exhibits required to be filed by Item 15(b) are listed herein in the Exhibit Index.
126
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on this the 21st day of February 2018.
SIGNATURES
PROASSURANCE CORPORATION
By:
/S/ W. STANCIL STARNES
W. Stancil Starnes
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name
Title
Date
/S/ W. STANCIL STARNES, J.D.
W. Stancil Starnes, J.D.
Chairman of the Board, Chief Executive Officer
(Principal Executive Officer) and President
February 21, 2018
/S/ EDWARD L. RAND, JR.
Edward L. Rand, Jr.
Chief Operating Officer and Chief Financial
Officer
/S/ SAMUEL A. DI PIAZZA, JR.
Director
Samuel A. Di Piazza, Jr.
/S/ ROBERT E. FLOWERS, M.D.
Director
Robert E. Flowers, M.D.
/S/ M. JAMES GORRIE
Director
M. James Gorrie
/S/ BRUCE D. ANGIOLILLO, J.D.
Director
Bruce D. Angiolillo
/S/ JOHN J. MCMAHON JR.
Director
John J. McMahon
/S/ KATISHA T. VANCE
Katisha T. Vance
Director
/S/ FRANK A. SPINOSA, D.P.M.
Director
Frank A. Spinosa, D.P.M.
/S/ ZIAD R. HAYDAR, M.D.
Director
Ziad R. Haydar, M.D.
/S/ THOMAS A.S. WILSON, JR., M.D. Director
Thomas A. S. Wilson, Jr., M.D.
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
February 21, 2018
127
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of ProAssurance Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ProAssurance Corporation and subsidiaries (the Company)
as of December 31, 2017 and 2016, the related consolidated statements of changes in capital, income and comprehensive
income, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial
statement schedules listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the
financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company
at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in
the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 21, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young, LLP
We have served as the Company's auditor since 1977.
Birmingham, Alabama
February 21, 2018
128
ProAssurance Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Investments
Fixed maturities, available for sale, at fair value; amortized cost, $2,257,188 and
$2,586,821, respectively
Equity securities, trading, at fair value; cost, $425,942 and $353,744, respectively
Short-term investments
Business owned life insurance
Investment in unconsolidated subsidiaries
Other investments, $52,301 and $31,501 at fair value, respectively, otherwise at cost or
amortized cost
Total Investments
Cash and cash equivalents
Premiums receivable
Receivable from reinsurers on paid losses and loss adjustment expenses
Receivable from reinsurers on unpaid losses and loss adjustment expenses
Prepaid reinsurance premiums
Deferred policy acquisition costs
Deferred tax asset, net
Real estate, net
Intangible assets, net
Goodwill
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses
Unearned premiums
Reinsurance premiums payable
Total Policy Liabilities
Other liabilities
Debt less debt issuance costs
Total Liabilities
Shareholders’ Equity
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 62,824,523 and
62,660,234 shares issued, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of
$5,218 and $9,894, respectively
Retained earnings
Treasury shares, at cost, 9,367,502 shares and 9,408,977 shares, respectively
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
See accompanying notes.
129
December 31,
2017
December 31,
2016
$ 2,280,242
470,609
432,126
62,113
330,591
$ 2,613,406
387,274
442,084
60,134
340,906
110,847
3,686,528
134,495
238,085
7,317
335,585
39,916
50,261
9,930
31,975
82,952
210,725
101,428
$ 4,929,197
81,892
3,925,696
117,347
223,480
5,446
273,475
39,723
46,809
10,256
31,814
84,406
210,725
96,004
$ 5,065,181
$ 2,048,381
398,884
37,726
2,484,991
437,600
411,811
3,334,402
$ 1,993,428
372,563
30,001
2,395,992
422,285
448,202
3,266,479
628
383,077
627
376,518
14,911
1,614,186
(418,007)
1,594,795
$ 4,929,197
17,399
1,824,088
(419,930)
1,798,702
$ 5,065,181
ProAssurance Corporation and Subsidiaries
Consolidated Statements of Changes in Capital
(In thousands)
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
$
623
$ 359,577
$
58,204
$ 1,991,704
$(252,164) $ 2,157,944
(169,793)
— (169,793)
Balance at January 1, 2015
Common shares reacquired
Common shares issued for compensation and
effect of shares reissued to stock purchase
plan
Share-based compensation
Net effect of restricted and performance
shares issued and stock options exercised
Dividends to shareholders
Other comprehensive income (loss)
Net income
Balance at December 31, 2015
Common shares reacquired
Common shares issued for compensation and
effect of shares reissued to stock purchase
plan
Share-based compensation
Net effect of restricted and performance
shares issued and stock options exercised
Dividends to shareholders
Other comprehensive income (loss)
Net income
Balance at December 31, 2016
Cumulative-effect adjustment-
ASU 2016-09 adoption*
Common shares issued for compensation
and effect of shares reissued to stock
purchase plan
Share-based compensation
Net effect of restricted and performance
shares issued
Dividends to shareholders
Other comprehensive income (loss)
Net income
—
—
—
2
—
—
—
625
—
—
—
2
—
—
—
—
1,232
9,166
(4,576)
—
—
—
—
—
—
—
—
(34,349)
—
—
—
—
(119,866)
—
116,197
365,399
23,855
1,988,035
—
1,696
12,455
(3,032)
—
—
—
—
—
—
—
—
(6,456)
—
—
—
—
—
(315,028)
—
151,081
627
376,518
17,399
1,824,088
2,397
—
—
—
—
—
(419,560)
(2,106)
1,736
—
—
—
—
—
(419,930)
3,629
9,166
(4,574)
(119,866)
(34,349)
116,197
1,958,354
(2,106)
3,432
12,455
(3,030)
(315,028)
(6,456)
151,081
1,798,702
—
—
—
1
—
—
—
425
957
10,615
(5,438)
—
—
—
—
—
—
—
—
(2,488)
—
(276)
—
149
—
—
1,923
—
2,880
10,615
—
(316,890)
—
107,264
—
—
(5,437)
(316,890)
(2,488)
107,264
$(418,007) $ 1,594,795
—
—
Balance at December 31, 2017
$
628
$ 383,077
$
14,911
$ 1,614,186
* See Note 1 of the Notes to Consolidated Financial Statements for discussion of accounting guidance adopted during the year.
See accompanying notes.
130
ProAssurance Corporation and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
(In thousands, except per share data)
Revenues
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated subsidiaries
Net realized investment gains (losses):
OTTI losses
Portion of OTTI losses recognized in other comprehensive income
before taxes
Net impairment losses recognized in earnings
Other net realized investment gains (losses)
Total net realized investment gains (losses)
Other income
Total revenues
Expenses
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Operating expense
DPAC Amortization
Segregated portfolio cells dividend expense (income)
Interest expense
Total expenses
Income before income taxes
Provision for income taxes
Current expense (benefit)
Deferred expense (benefit)
Total income tax expense (benefit)
Net income
Other comprehensive income (loss), after tax, net of reclassification
adjustments
Comprehensive income
Earnings per share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Cash dividends declared per common share
See accompanying notes.
131
Year Ended December 31
2017
2016
2015
$
738,531
$
733,281
$
95,662
8,033
100,012
(5,762)
694,149
108,660
3,682
(13,200)
(10,834)
(19,917)
248
(12,952)
29,361
16,409
7,514
1,068
(9,766)
44,641
34,875
7,808
4,572
(15,345)
(26,294)
(41,639)
7,227
866,149
870,214
772,079
469,158
443,229
410,711
140,002
139,232
95,751
15,771
16,844
88,378
8,142
15,032
737,526
694,013
137,508
79,556
853
14,596
643,224
128,623
176,201
128,855
19,666
1,693
21,359
16,586
8,534
25,120
28,652
(15,994)
12,658
107,264
151,081
116,197
(2,488)
(6,456)
(34,349)
104,776
$
144,625
$
81,848
2.01
2.00
$
$
2.84
2.83
$
$
2.12
2.11
53,393
53,611
53,216
53,448
54,795
55,017
5.93
$
5.93
$
2.24
$
$
$
$
ProAssurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Operating Activities
Net income
Adjustments to reconcile income to net cash provided by operating activities:
Year Ended December 31
2017
2016
2015
$
107,264
$
151,081
$
116,197
Depreciation and amortization, net of accretion
(Increase) decrease in cash surrender value of BOLI
Net realized investment (gains) losses
Share-based compensation
Deferred income taxes
Policy acquisition costs, net of amortization (net deferral)
Equity in (earnings) loss of unconsolidated subsidiaries
Other
Other changes in assets and liabilities:
Premiums receivable
Reinsurance related assets and liabilities
Other assets
Reserve for losses and loss adjustment expenses
Unearned premiums
Other liabilities
Net cash provided (used) by operating activities
Investing Activities
Purchases of:
Fixed maturities, available for sale
Equity securities, trading
Other investments
Funding of qualified affordable housing project tax credit partnerships
Investment in unconsolidated subsidiaries
Proceeds from sales or maturities of:
Fixed maturities, available for sale
Equity securities, trading
Other investments
Distributions from unconsolidated subsidiaries
Net sales or maturities (purchases) of short-term investments
Unsettled security transactions, net change
Purchases of capital assets
Purchases of intangible assets
Other
Net cash provided (used) by investing activities
Continued on following page.
132
28,796
(1,979)
(16,409)
10,615
1,693
(3,452)
(8,033)
108
(14,605)
(56,449)
(792)
54,953
26,321
20,965
148,996
(614,440)
(207,857)
(50,362)
(507)
(42,183)
932,070
146,356
25,372
56,931
4,167
(2,031)
(10,485)
(2,984)
(9,380)
224,667
32,789
(2,008)
(34,875)
12,455
8,534
(2,421)
5,762
1,772
(6,446)
(26,108)
15,665
(11,898)
10,497
14,321
169,120
(636,377)
(112,912)
(18,613)
(1,019)
(50,890)
752,516
85,226
13,797
16,947
(322,872)
1,388
(10,922)
—
4,792
(278,939)
36,218
(2,032)
41,639
9,166
(15,994)
(5,598)
(3,682)
466
(14,506)
(3,411)
(10,458)
(52,940)
16,238
(179)
111,124
(580,577)
(271,608)
(33,366)
(12,477)
(61,444)
886,886
236,476
33,638
28,017
11,932
2,339
(9,524)
—
(2,505)
227,787
Continued from the previous page.
Financing Activities
Borrowings (repayments) under Revolving Credit Agreement
Proceeds from Mortgage Loans
Repurchase of common stock
Dividends to shareholders
External capital contribution received for segregated portfolio cells
Other
Net cash provided (used) by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Year Ended December 31
2017
2016
2015
(77,000)
40,460
—
(315,228)
2,936
(7,683)
(356,515)
17,148
117,347
100,000
—
(2,106)
(118,812)
9,952
(2,968)
(13,934)
(123,753)
241,100
$
134,495
$
117,347
$
100,000
—
(172,772)
(217,626)
836
(5,289)
(294,851)
44,060
197,040
241,100
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for income taxes, net of refunds
Cash paid during the year for interest
$
$
17,193
15,892
$
$
(8,683) $
$
14,732
42,784
13,996
Significant Non-Cash Transactions
Dividends declared and not yet paid
See accompanying notes.
$
267,292
$
265,659
$
69,447
133
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
1. Accounting Policies
Organization and Nature of Business
ProAssurance Corporation (ProAssurance, PRA or the Company), a Delaware corporation, is an insurance holding
company primarily for wholly owned specialty property and casualty insurance entities including an entity that is the majority
capital provider to Syndicate 1729 at Lloyd's of London. Risks insured are primarily liability risks located within the U.S. As
described in more detail in Note 15, ProAssurance operates in four reportable segments: Specialty P&C, Workers'
Compensation, Lloyd's Syndicate and Corporate.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ProAssurance Corporation and its wholly
owned subsidiaries. Investments in entities where ProAssurance holds a greater than minor interest but does not hold a
controlling interest are accounted for using the equity method. All significant intercompany accounts and transactions are
eliminated in consolidation. ProAssurance subsidiaries located in the U.K. are reported on a quarter delay due to timing issues
regarding the availability of information, except when information is available that is material to the current period.
Furthermore, investment results associated with our FAL investments and certain U.S. paid administrative expenses are
reported concurrently as that information is available on an earlier time frame.
Basis of Presentation
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosures related to these
amounts at the date of the financial statements. Actual results could differ from those estimates.
Reclassifications
In the second quarter of 2017, ProAssurance began presenting separately the components of underwriting, policy
acquisition and operating expense as operating expense and DPAC amortization on the Condensed Consolidated Statements of
Income and Comprehensive Income in order to provide additional details for investors. The Consolidated Statements of Income
and Comprehensive Income for the years ended December 31, 2016 and 2015 have been reclassified to conform to the current
period presentation. Total underwriting, policy acquisition and operating expense as well as net income for all periods presented
was not affected by the change in presentation.
Certain other insignificant prior year amounts have been reclassified to conform to the current year presentation.
Accounting Policies
The significant accounting policies followed by ProAssurance in making estimates that materially affect financial
reporting are summarized in these Notes to Consolidated Financial Statements.
Recognition of Revenues
Insurance premiums are recognized as revenues pro rata over the terms of the policies, which are principally one year in
duration.
Credit Losses
ProAssurance's premium and agency receivables are exposed to credit losses, but to-date have not experienced any
significant amount of credit losses. Recorded allowances for credit losses were less than $1.5 million at both December 31,
2017 and 2016. Neither estimated credit losses nor actual credit write-offs, net of recoveries, exceeded $0.5 million during the
years ended December 31, 2017 and 2016.
Earned But Unbilled Premiums
Workers’ compensation premiums are determined based upon the payroll of the insured, the applicable premium rates
and, where applicable, an experience based modification factor. An audit of the policyholders’ records is conducted after
policy expiration to make a final determination of applicable premiums. Audit premium due from or due to a policyholder as a
result of an audit is reflected in net premiums earned when billed. ProAssurance tracks, by policy, the amount of additional
134
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
premium billed in final audit invoices as a percentage of payroll exposure and uses this information to estimate the probable
additional amount that it has earned, but not yet billed, as of the balance sheet date. Changes to the EBUB estimate are
included in net premiums earned in the period recognized. As of December 31, 2017 and 2016, ProAssurance carried EBUB
of $4.3 million as a part of premiums receivable.
Losses and Loss Adjustment Expenses
ProAssurance establishes its reserve for losses and loss adjustment expenses ("reserve for losses" or "reserve") based on
estimates of the future amounts necessary to pay claims and expenses associated with the investigation and settlement of
claims. The reserve for losses is determined on the basis of individual claims and payments thereon as well as actuarially
determined estimates of future losses based on past loss experience, available industry data and projections as to future claims
frequency, severity, inflationary trends, judicial trends, legislative changes and settlement patterns.
Management establishes the reserve for losses after taking into consideration a variety of factors including the
conclusions reached by internal and consulting actuaries, premium rates, claims frequency and severity, historical paid and
incurred loss development trends, the expected effect of inflation, general economic trends, and the legal and political
environment. Management updates and reviews the data underlying the estimation of the reserve for losses each reporting
period and makes adjustments to loss estimation assumptions that best reflect emerging data. Both internal and consulting
actuaries perform an in-depth review of the reserve for losses on at least a semi-annual basis using the loss and exposure data of
ProAssurance's subsidiaries. Consulting actuaries provide reports to management regarding the adequacy of reserves.
Estimating casualty insurance reserves, and particularly long-tailed insurance reserves, is a complex process. Long-tailed
insurance is characterized by the extended period of time between collecting the premium for insuring a risk and the ultimate
payment of losses. For a high proportion of the risks insured or reinsured by ProAssurance, the period of time required to
resolve a claim is often five years or more, and claims may be subject to litigation. Estimating losses for these long-tailed
claims requires ProAssurance to make and revise judgments and assessments regarding multiple uncertainties over an extended
period of time. As a result, reserve estimates may vary significantly from the eventual outcome. Reserve estimates and the
assumptions on which these estimates are predicated are regularly reviewed and updated as new information becomes available.
Any adjustments necessary are reflected in then current operations. Due to the size of ProAssurance’s reserve for losses, even a
small percentage adjustment to these estimates could have a material effect on earnings in the period in which the adjustment is
made, as was the case in 2017, 2016 and 2015.
The effect of adjustments made to reinsured losses is mitigated by the corresponding adjustment that is made to
reinsurance recoveries. Thus, in any given year, ProAssurance may make significant adjustments to gross losses that have little
effect on its net losses.
Reinsurance Receivables
ProAssurance enters into reinsurance agreements whereby other insurance entities agree to assume a portion of the risk
associated with certain policies issued by ProAssurance. In return, ProAssurance agrees to pay a premium to the reinsurer.
ProAssurance uses reinsurance to provide capacity to write larger limits of liability, to provide reimbursement for losses
incurred under the higher limit coverages the Company offers, to provide protection against losses in excess of policy limits,
and, in the case of risk sharing arrangements, to align the Company's objectives with those of its strategic business partners and
to provide custom insurance solutions for large customer groups.
Receivable from reinsurers on paid losses and loss adjustment expenses is the estimated amount of losses already paid
that will be recoverable from reinsurers. Receivable from reinsurers on unpaid losses and loss adjustment expenses is the
estimated amount of future loss payments that will be recoverable from reinsurers. Reinsurance recoveries are the portion of
losses incurred during the period that are estimated to be allocable to reinsurers. Premiums ceded are the estimated premiums
that will be due to reinsurers with respect to premiums earned and losses incurred during the period.
These estimates are based upon management’s estimates of ultimate losses and the portion of those losses that are
allocable to reinsurers under the terms of the related reinsurance agreements. Given the uncertainty of the ultimate amounts of
losses, these estimates may vary significantly from the ultimate outcome. Management regularly reviews these estimates and
any adjustments necessary are reflected in the period in which the estimate is changed. Due to the size of the receivable from
reinsurers, even a small adjustment to the estimates could have a material effect on ProAssurance’s results of operations for the
period in which the change is made.
Reinsurance contracts do not relieve ProAssurance from its obligations to policyholders. ProAssurance continually
monitors its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Any amount determined to be
uncollectible is written off in the period in which the uncollectible amount is identified.
135
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Lloyd’s Premium Estimates
For certain insurance policies and reinsurance contracts written in the Lloyd’s Syndicate segment, premiums are initially
recognized based upon estimates of ultimate premium. Ultimate premium represents the total expected premium to be written
under binder authority and certain assumed reinsurance agreements. These estimates of ultimate premium are judgmental and
are dependent upon certain assumptions, including historical premium trends for similar agreements. As reports are received
from programs, ultimate premium estimates are revised, if necessary, with changes reflected in the current period.
Investments
Recurring Fair Value Measurements
Fair values of investment securities are primarily provided by independent pricing services. The pricing services provide
an exchange-traded price, if available, or provide an estimated price determined using multiple observable inputs, including
exchange-traded prices for similar assets. Management reviews valuations of securities obtained from the pricing services for
accuracy based upon the specifics of the security, including class, maturity, credit rating, durations, collateral and comparable
markets for similar securities. Multiple observable inputs are not available for certain of our investments, including corporate
debt not actively traded, other asset-backed securities, and investments in LPs/LLCs. Management values the corporate debt not
actively traded and the other asset-backed securities either using dealer quotes for similar securities or discounted cash flow
models using yields currently available for similar securities. Management values certain investment funds, primarily LPs/
LLCs, based on the NAV of the interest held, as provided by the fund.
Nonrecurring Fair Value Measurements
Management measures the fair value of certain assets on a nonrecurring basis either quarterly, annually or when events or
changes in circumstances indicate that the carrying amount of the assets may not be recoverable. These assets include cost and
equity method investments, fixed assets, goodwill and other intangible assets.
Fixed Maturities and Equity Securities
Fixed maturities and equity securities are considered as either available-for-sale or trading securities.
Available-for-sale securities are carried at fair value, determined as described above. Exclusive of OTTI losses, discussed
in a separate section that follows, unrealized gains and losses on available-for-sale securities are included, net of related tax
effects, in Shareholders’ Equity as a component of AOCI.
Investment income includes amortization of premium and accretion of discount related to available-for-sale debt
securities acquired at other than par value. Debt securities and mandatorily redeemable preferred stock with maturities beyond
one year when purchased are classified as fixed maturities.
Trading portfolio securities are carried at fair value, determined as described above, with the holding gains and losses
included in realized investment gains and losses in the current period.
Short-term Investments
Short-term investments, which have a maturity at purchase of one year or less, are primarily comprised of investments in
U.S. Treasury obligations, commercial paper and money market funds. All balances are reported at amortized cost, which
approximates fair value.
Other Investments
Investments in LPs/LLCs where ProAssurance has virtually no influence over the operating and financial policies of an
investee are accounted for using the cost method. Under the cost method, investments are valued at cost, with investment
income recognized when received.
Investments in convertible bond securities are carried at fair value as permitted by the accounting guidance for hybrid
financial instruments, with changes in fair value recognized in income as a component of net realized investment gains
(losses) during the period of change. Interest on convertible bond securities is recorded on an accrual basis based on
contractual interest rates and is included in net investment income.
136
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Investments in certain funds measure fund assets at fair value on a recurring basis and provide ProAssurance with a
NAV for its interest. As a practical expedient, ProAssurance considers the NAV provided to approximate the fair value of its
interest. Changes in fair value are recognized in income as a component of net realized investment gains (losses) during the
period of change.
Investment in Unconsolidated Subsidiaries
Equity investments, primarily investments in LPs/LLCs, where ProAssurance is deemed to have influence because it
holds a greater than a minor interest are accounted for using the equity method. Under the equity method, the recorded basis of
the investment is adjusted each period for the investor’s pro rata share of the investee’s income or loss. Investments in
unconsolidated subsidiaries include tax credit partnerships accounted for using the equity method, whereby ProAssurance’s
proportionate share of income or loss is included in equity in earnings (loss) of unconsolidated subsidiaries. Tax credits
received from the partnerships are recognized in the period received as a reduction to current tax expenses.
Business Owned Life Insurance
ProAssurance owns life insurance contracts on certain management employees. The life insurance contracts are carried at
their current cash surrender value. Changes in the cash surrender value are included in income in the current period as
investment income. Death proceeds from the contracts are recorded when the proceeds become payable under the policy terms.
Realized Gains and Losses
Realized investment gains and losses are recognized on the first-in, first-out basis for GAAP purposes and on the specific
identification basis for tax purposes.
Other-than-temporary Impairments
ProAssurance evaluates its available-for-sale investment securities, which at December 31, 2017 and 2016 consisted
entirely of fixed maturity securities, on at least a quarterly basis for the purpose of determining whether declines in fair value
below recorded cost basis represent OTTI. The Company considers an OTTI to have occurred:
• if there is intent to sell the security;
• if it is more likely than not that the security will be required to be sold before full recovery of its amortized cost
basis; and
• if the entire amortized basis of the security is not expected to be recovered.
The assessment of whether the amortized cost basis of a security, particularly an asset-backed debt security, is expected to
be recovered requires management to make assumptions regarding various matters affecting future cash flows. The choice of
assumptions is subjective and requires the use of judgment. Actual credit losses experienced in future periods may differ from
management’s estimates of those credit losses. Methodologies used to estimate the present value of expected cash flows are as
follows:
For non-structured fixed maturities (obligations of states, municipalities and political subdivisions and corporate debt) the
estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether
further principal and interest will be received. ProAssurance considers various factors in projecting recovery values and
recovery time frames, including the following:
• third-party research and credit rating reports;
• the current credit standing of the issuer, including credit rating downgrades, whether before or after the balance
sheet date;
• the extent to which the decline in fair value is attributable to credit risk specifically associated with the security or its
issuer;
• internal assessments and the assessments of external portfolio managers regarding specific circumstances
surrounding an investment, which indicate the investment is more or less likely to recover its amortized cost than
other investments with a similar structure;
• for asset-backed securities, the origination date of the underlying loans, the remaining average life, the probability
that credit performance of the underlying loans will deteriorate in the future, and our assessment of the quality of the
collateral underlying the loan;
• failure of the issuer of the security to make scheduled interest or principal payments;
• any changes to the rating of the security by a rating agency; and
• recoveries or additional declines in fair value subsequent to the balance sheet date.
137
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
For structured securities (primarily asset-backed securities), ProAssurance estimates the present value of the security’s
cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the
security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). ProAssurance
considers the most recently available six month averages of the levels of delinquencies, defaults, severities, and prepayments
for the collateral (loans) underlying the securitization or, if historical data is not available, sector based assumptions, to estimate
expected future cash flows of these securities.
Exclusive of securities where there is an intent to sell or where it is not more likely than not that the security will be
required to be sold before recovery of its amortized cost basis, OTTI for debt securities is separated into a credit component and
a non-credit component. The credit component of an OTTI is the difference between the security’s amortized cost basis and the
present value of its expected future cash flows, while the non-credit component is the remaining difference between the
security’s fair value and the present value of expected future cash flows. The credit component of the OTTI is recognized in
earnings while the non-credit component is recognized in OCI.
Investments in tax credit partnerships are evaluated for OTTI by considering both qualitative and quantitative factors
which include: whether the current expected cash flows from the investment, primarily tax benefits, are less than those expected
at the time the investment was acquired due to various factors, such as a change in statutory tax rate, and ProAssurance's ability
and intent to hold the investment until the recovery of its carrying value.
Investments which are accounted for under the equity method are evaluated for impairment whenever events or changes
in circumstances indicate that the carrying amount of the investment may not be recoverable. These circumstances include, but
are not limited to, evidence of the inability to recover the carrying amount of the investment, the inability of the investee to
sustain an earnings capacity that would justify the carrying amount of the investment or a current fair value of the investment
that is less than the carrying amount.
Investments in LPs/LLCs which are not accounted for under the equity method are evaluated for impairment by
comparing ProAssurance’s carrying value to the NAV of ProAssurance’s interest as reported by the LP/LLC. Additionally,
management considers the performance of the LP/LLC relative to the market and its stated objectives, cash flows expected
from the interest and the audited financial statements of the LP/LLC, if available.
ProAssurance recognizes OTTI, exclusive of non-credit OTTI, in earnings as a part of net realized investment gains
(losses). In subsequent periods, any measurement of gain, loss or impairment is based on the revised amortized basis of the
security. Non-credit OTTI on debt securities and declines in fair value of available-for-sale securities not considered to be other-
than-temporary are recognized in OCI.
Asset-backed debt securities that have been impaired due to credit or are below investment grade quality are accounted for
under the effective yield method. Under the effective yield method, estimates of cash flows expected over the life of asset-
backed securities are used to recognize income on the investment balance for subsequent accounting periods.
Derivatives
ProAssurance records derivative instruments at fair value in the Consolidated Balance Sheets. ProAssurance accounts for
the changes in fair value of derivatives depending on whether the derivative is designated as a hedging instrument and if so, the
type of hedging relationship. For derivative instruments not designated as hedging instruments, ProAssurance recognizes the
change in fair value of the derivative in earnings during the period of change. As of December 31, 2017, ProAssurance has not
designated any derivative instruments as hedging instruments and does not use derivative instruments for trading purposes.
Foreign Currency
The functional currency of all ProAssurance foreign subsidiaries is the U.S. dollar.
Cash and Cash Equivalents
For purposes of the Consolidated Balance Sheets and Consolidated Statements of Cash Flows, ProAssurance considers all
demand deposits and overnight investments to be cash equivalents.
Deferred Policy Acquisition Costs; Ceding Commission Income
Costs that vary with and are directly related to the successful production of new and renewal premiums (primarily
premium taxes, commissions and underwriting salaries) are deferred to the extent they are recoverable against unearned
premiums and are amortized as related premiums are earned. Unearned ceding commission income is reported as an offset to
DPAC. Ceding commission earned is reported as an offset to DPAC amortization.
138
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Income Taxes/Deferred Taxes
ProAssurance files a consolidated federal income tax return. Tax-related interest and penalties are recognized as
components of tax expense.
ProAssurance evaluates tax positions taken on tax returns and recognizes positions in the financial statements when it is
more likely than not that the position will be sustained upon resolution with a taxing authority. If recognized, the benefit is
measured as the largest amount of benefit that has a greater than fifty percent probability of being realized. Uncertain tax
positions are reviewed each period by considering changes in facts and circumstances, such as changes in tax law, interactions
with taxing authorities and developments in case law, and adjustments would be made if considered necessary. Adjustments to
unrecognized tax benefits may affect income tax expense and the settlement of uncertain tax positions may require the use of
cash. Other than differences related to timing, no significant adjustments were considered necessary during the years ended
December 31, 2017 or 2016.
Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and
liabilities determined for financial reporting purposes and the basis determined for income tax purposes. ProAssurance’s
temporary differences principally relate to loss reserves, unearned premium, DPAC, unrealized investment gains (losses) and
basis differentials in fixed assets and investments. Deferred tax assets and liabilities are measured using the enacted tax rates
expected to be in effect when such benefits are realized. ProAssurance reviews its deferred tax assets quarterly for impairment.
If management determines that it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation
allowance is recorded to reduce the carrying value of the asset. In assessing the need for a valuation allowance, management is
required to make certain judgments and assumptions about the future operations of ProAssurance based on historical experience
and information as of the measurement date regarding reversal of existing temporary differences, carryback capacity, future
taxable income, including its capital and operating characteristics, and tax planning strategies.
In 2017 and 2016, a valuation allowance was established against the full value of the deferred tax asset related to the NOL
carryforwards for the U.K. operations as management concluded that it was more likely than not that the deferred tax asset will
not be realized. See further discussion in Note 5.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. On December 22,
2017, the TCJA was signed into law and contains several key provisions that impact ProAssurance, including the reduction of
the corporate tax rate to 21% effective January 1, 2018, the reduction in the amount of executive compensation that could
qualify as a tax deduction, a minimum tax on payments made to related foreign entities and a change in how property and
casualty taxpayers discount loss reserves. See Note 5 for further discussion of the TCJA.
Real Estate
Real Estate balances are reported at cost or, for properties acquired in business combinations, estimated fair value on the
date of acquisition, less accumulated depreciation. Real estate principally consists of properties in use as corporate offices.
Depreciation is computed over the estimated useful lives of the related property using the straight-line method. Excess office
capacity is leased or made available for lease; rental income is included in other income and real estate expenses are included in
operating expense.
Real estate accumulated depreciation was approximately $24.0 million and $22.9 million at December 31, 2017 and
2016, respectively. Real estate depreciation expense was $1.1 million, $1.4 million and $1.5 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Intangible Assets
Intangible assets with definite lives, primarily consisting of agency and policyholder relationships, are amortized over the
estimated useful life of the asset; those with indefinite lives, primarily state licenses, are not amortized. All intangible assets are
evaluated for impairment on an annual basis. The following table provides additional information regarding ProAssurance's
intangible assets.
139
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Gross Carrying Value
Accumulated Amortization
Amortization Expense
December 31
December 31
Year Ended December 31
(In millions)
2017
2016
2017
2016
2017
2016
2015
Intangible Assets
Non-amortizable
Amortizable *
Total Intangible Assets
$
$
25.8
97.5
123.3
$
$
25.8
93.6
119.4
$
40.3
$
35.0
$
5.8
$
8.1
$
8.3
* At December 31, 2017, the gross carrying value included intangible assets acquired during the third quarter of 2017.
Aggregate amortization expense for intangible assets is estimated to be $6.2 million for the year ended December 31,
2018, $6.1 million for each of the years ended December 31, 2019 and 2020 and $6.0 million for each of the years ended
December 31, 2021 and 2022.
Goodwill
Goodwill is recognized in conjunction with business acquisitions as the excess of the purchase consideration for the
business acquisition over the fair value of identifiable assets acquired and liabilities assumed. The fair value of identifiable
assets and liabilities, and thus goodwill, is subject to redetermination within a measurement period of up to one year following
completion of a business acquisition.
Management evaluates goodwill for impairment annually on October 1 and upon the occurrence of certain triggering
events or substantive changes in circumstances that indicate the fair value of goodwill may be impaired. Impairment of
goodwill is tested at the reporting unit level, which is consistent with the reportable segments identified in Note 15. Of the
Company's four reporting units, two have goodwill - Specialty P&C and Workers' Compensation.
When testing goodwill for impairment, management has the option to first assess qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a
reporting unit is less than its carrying amount. If management elects to perform a qualitative assessment and determines that an
impairment is more likely than not, management is then required to perform the two-step quantitative impairment test,
otherwise no further analysis is required. Management also may elect not to perform the qualitative assessment and, instead,
proceed directly to the two-step quantitative impairment test.
In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying
value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for
purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and
liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit's goodwill
exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.
When performing the two-step quantitative impairment test, management estimates the fair value of the Company's
reporting units using the income and market approaches. The estimate of fair value derived from the income approach is based
on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of
capital determined separately for each reporting unit. The estimate of fair value derived from the market approach is based on
earnings multiple data. The determination of fair value involves the use of significant estimates and assumptions, including
revenue growth rates, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates,
discount rates, comparable public companies and synergistic benefits available to market participants. In addition, management
makes certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine
the carrying amount of each reporting unit. To corroborate the reporting units’ valuation, management performs a reconciliation
of the estimate of the aggregate fair value of the reporting units to ProAssurance's market capitalization, including consideration
of a control premium.
As of the most recent evaluation date on October 1, 2017, management performed a qualitative goodwill impairment test
for both the Specialty P&C and Workers' Compensation segments. The Specialty P&C and Workers' Compensation segments
have historically had an excess of fair value over book value and based on current operations are expected to continue to have
an excess of fair value over book value; therefore, management's annual impairment test for both segments was performed
qualitatively. In applying the qualitative approach, management considered macroeconomic factors, industry and market
conditions, cost factors that could have a negative impact on the reporting units, actual financial performance of the reporting
units versus expectations and management’s future business expectations. As a result of the qualitative assessments,
management concluded that it was not more likely than not that the fair value of the reporting unit was less than its carrying
140
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
value as of the testing date; therefore, no further impairment testing was required. No goodwill impairment was recorded in
2017, 2016 or 2015.
Other Liabilities
Other liabilities at December 31, 2017 and 2016 consisted of the following:
(In thousands)
SPC dividends payable
Unpaid dividends
All other
Total other liabilities
$
2017
46,925
267,292
123,383
2016
$
34,289
265,659
122,337
$ 437,600
$ 422,285
SPC dividends payable are the cumulative undistributed earnings contractually payable to the external preferred
shareholders of SPCs operated by ProAssurance's Cayman Islands subsidiary, Eastern Re.
Unpaid dividends represent common stock dividends declared by ProAssurance's Board that had not yet been paid.
Unpaid dividends at both December 31, 2017 and 2016 included a special dividend declared in the fourth quarter period that
was paid in January of the following year.
Treasury Shares
Treasury shares are reported at cost, and are reflected on the Consolidated Balance Sheets as an unallocated reduction of
total equity.
Share-Based Payments
Compensation cost for share-based payments is measured based on the grant-date fair value of the award, recognized over
the period in which the employee is required to provide service in exchange for the award. Excess tax benefits (tax deductions
realized in excess of the compensation costs recognized for the exercise of the awards, multiplied by the incremental tax rate)
are reported as operating cash inflows.
Subsequent Events
ProAssurance evaluates events that occurred subsequent to December 31, 2017, for recognition or disclosure in its
Consolidated Financial Statements. See Note 19 for further discussion of subsequent events.
Accounting Changes Adopted
Improvements to Employee Share-Based Payment Accounting
Effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, the FASB
issued guidance that simplifies several aspects of the accounting for share-based payment transactions, including the income tax
consequences, classification of cash flows, and the classification of awards as either equity or liabilities. Under the new
guidance, the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting
purposes is to be recognized as income tax expense in the current period and included with other income tax cash flows as an
operating activity. The threshold for equity classification has also been revised to permit withholdings up to the maximum
statutory tax rates in the applicable jurisdictions. The update also provides an accounting policy election to account for
forfeitures as they occur. ProAssurance adopted the guidance as of January 1, 2017. The primary effects of the adoption on the
current period are the following: (1) using a prospective application, ProAssurance recorded unrecognized excess tax benefits
of $2.8 million as current tax expense for the year ended December 31, 2017, (2) using a modified retrospective application,
ProAssurance elected to recognize forfeitures as they occur and recorded a $0.4 million increase to additional paid-in capital,
and a respective $0.3 million reduction to retained earnings and a $0.1 million increase to deferred taxes to reflect the
incremental share-based compensation expense, net of related tax impacts, that would have been recognized in prior years
under the modified guidance and (3) using a prospective application, ProAssurance classified excess tax benefits from share-
based compensation of $2.3 million in operating activities in the Consolidated Statements of Cash Flows for the year ended
December 31, 2017.
141
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Interests Held Through Related Parties that are Under Common Control
Effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, the FASB
issued additional guidance regarding consolidation of legal entities such as LPs/LLCs and securitization structures
(collateralized debt obligations, collateralized loan obligations and mortgage-backed security transactions). The new guidance
modifies the criteria used by a reporting entity when determining if it is a primary beneficiary of a VIE when there are entities
under common control and the reporting entity has indirect interests in the VIE through related party relationships.
ProAssurance adopted the guidance as of January 1, 2017. Adoption of the guidance had no material effect on ProAssurance’s
results of operations or financial position.
Simplifying the Transition to the Equity Method of Accounting
Effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, the FASB
issued guidance that eliminates the requirement for retroactive restatement when an investment qualifies for use of the equity
method as a result of an increase in the level of ownership interest or degree of influence. The new guidance provides that the
cost of acquiring an additional interest in an investee is to be added to the current basis of an investor’s previously held interest
and the equity method of accounting adopted as of the date the investment becomes qualified for equity method accounting
with no retroactive adjustment of the investment. If an available-for-sale equity security qualifies for the equity method of
accounting, the unrealized holding gain or loss in AOCI is to be recognized through earnings at the date the investment
becomes qualified for use of the equity method. ProAssurance adopted the guidance as of January 1, 2017. Adoption of the
guidance had no material effect on ProAssurance’s results of operations or financial position.
Clarifying the Definition of a Business
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB
issued guidance which provides clarification of the definition of a business, affecting areas such as acquisitions, disposals,
goodwill and consolidation. The new guidance intends to assist entities with determining whether a transaction should be
accounted for as an acquisition or disposal of assets or a business. The guidance will be applied prospectively to any transaction
occurring within the period of adoption. ProAssurance early adopted the guidance during the third quarter of 2017 and adoption
of the guidance had no material effect on ProAssurance’s results of operations or financial position.
Accounting Changes Not Yet Adopted
Restricted Cash
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB
issued guidance related to the classification of restricted cash presented in the statement of cash flows with the objective of
reducing diversity in practice. Under the new guidance, entities are required to include restricted cash and restricted cash
equivalents with cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts as presented
on the statement of cash flows. ProAssurance plans to adopt the guidance beginning January 1, 2018. Adoption is not expected
to have a material effect on ProAssurance’s results of operations, financial position or cash flows.
Intra-Entity Transfers of Assets Other than Inventory
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB
issued guidance which reduces the complexity in accounting standards related to the income tax consequences of intra-entity
transfers of assets other than inventory between tax-paying components. A tax-paying component is an individual entity or
group of entities that is consolidated for tax purposes. Under the new guidance, entities are required to recognize income tax
consequences of an intra-entity transfer of assets other than inventory when the transfer occurs instead of delaying recognition
until the asset has been sold to an outside party. ProAssurance plans to adopt the guidance beginning January 1, 2018. Adoption
is not expected to have a material effect on ProAssurance's results of operations, financial position or cash flows as the
Company currently does not transfer assets between tax paying components.
Classification of Certain Cash Receipts and Cash Payments
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB
issued guidance related to the classification of certain cash receipts and cash payments presented in the statement of cash flows
with the objective of reducing diversity in practice. ProAssurance plans to adopt the guidance beginning January 1, 2018 and
will elect to use the cumulative earnings approach for presenting distributions from equity method investees. Adoption is not
expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.
142
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Revenue from Contracts with Customers
Effective for fiscal years beginning after December 15, 2017 the FASB issued guidance related to revenue from contracts
with customers. The core principle of the new guidance is that revenue is recognized to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. ProAssurance plans to adopt the guidance beginning January 1, 2018 under the modified retrospective
method. As the majority of ProAssurance's revenues come from insurance contracts which fall under the scope of other FASB
standards, less than 1% of the Company's revenue for the year ended December 31, 2017 is subject to the updated guidance.
Therefore, adoption of the guidance is not expected to have a material effect on ProAssurance’s results of operations or
financial position.
Recognition and Measurement of Financial Assets and Financial Liabilities
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB
issued guidance that requires equity investments (except those accounted for under the equity method of accounting, or those
that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.
The new guidance also specifies that an entity use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes and present financial assets and liabilities by measurement category and form of financial asset. Other
provisions of the new guidance include: revised disclosure requirements related to the presentation in comprehensive income of
changes in the fair value of liabilities; elimination, for public companies, of disclosure requirements relative to the methods and
significant assumptions underlying fair values disclosed for financial instruments measured at amortized cost; and simplified
impairment assessments for equity investments without readily determinable fair values. ProAssurance plans to adopt the
guidance beginning January 1, 2018. The majority of ProAssurance's equity investments are either measured at fair value or
accounted for under the equity method of accounting. As of December 31, 2017, the fair value of the equity investments
impacted by this guidance exceeded the cost basis by approximately $10.5 million, which will be reflected as a cumulative-
effect adjustment to beginning retained earnings in 2018. Therefore, adoption of the guidance is not expected to have a material
effect on ProAssurance’s results of operations or financial position.
Modification Accounting for Employee Share-Based Payment Awards
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, the FASB
issued guidance which reduces the complexity in accounting standards when there is a change in the terms or conditions of a
share-based payment award. The new guidance clarifies that an entity should apply the modification accounting guidance if the
value, vesting conditions or classification of the award changes. ProAssurance plans to adopt the guidance beginning January 1,
2018. Adoption of the guidance is not expected to have a material effect on ProAssurance’s results of operations or financial
position.
Reclassification of Certain Tax Effects from AOCI
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early
adoption permitted, the FASB issued guidance which permits a reclassification from AOCI to retained earnings for stranded tax
effects resulting from the newly enacted federal corporate tax rate from the TCJA. The amount of the reclassification from
AOCI to retained earnings will be the difference between the historical corporate tax rate and the newly enacted 21% corporate
tax rate on deferred tax items originally established through OCI and not net income. The guidance allows entities to adopt in
any interim or annual period for which financial statements have not yet been issued and apply the guidance either (1) in the
period of adoption or (2) retrospectively to each period in which the effect of the change in the tax rate is recognized.
ProAssurance plans to early adopt this guidance on January 1, 2018 and will elect to apply this guidance in the period of
adoption. Using the specific identification method, ProAssurance will increase AOCI by approximately $3.4 million and
decrease retained earnings by the same amount in the Statement of Changes in Capital as of the beginning of 2018. Adoption of
this guidance is not expected to have a material effect on our financial position, results of operations or cash flows in the period
of adoption.
Premium Amortization on Purchased Callable Debt Securities
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB
issued guidance that will require the premium for certain callable debt securities to be amortized over a shorter period than is
currently required. Currently amortization is permitted over the contractual life of the instrument and the guidance shortens the
amortization to the earliest call date. The purpose of the guidance is to more closely align the amortization period of premiums
to expectations incorporated in market pricing on the underlying securities. ProAssurance plans to adopt the guidance beginning
January 1, 2019. As ProAssurance amortizes premium on callable debt securities to the earliest call date, adoption of the
guidance is not expected to have a material effect on ProAssurance’s results of operations or financial position.
143
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Leases
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB
issued guidance that requires a lessee to recognize for all leases (with the exception of short-term leases) a lease liability, which
is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset,
which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ProAssurance
plans to adopt the guidance beginning January 1, 2019 and is currently in the process of evaluating all of its leases. As the
majority of ProAssurance's leases as of December 31, 2017 are real estate operating leases and are not considered to be
material, adoption of the guidance is not expected to have a material effect on ProAssurance’s results of operations or financial
position.
Derivatives and Hedging
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB
issued guidance to improve financial reporting of hedging relationships to better portray the entity's risk management activities
in the consolidated financial statements. The new guidance eliminates the requirement to separately measure and report hedge
ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income
statement line as the hedged item. ProAssurance plans to adopt the guidance beginning January 1, 2019. ProAssurance's
derivative instrument at December 31, 2017 is not designated as a hedging instrument, and therefore, adoption is not expected
to have a material effect on results of operations or financial position.
Simplifying the Test for Goodwill Impairment
Effective for the fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB
issued guidance that simplifies the requirements to test goodwill for impairment for business entities that have goodwill
reported in their financial statements. The guidance eliminates the second step of the impairment test which measures a
goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount. In
addition, the guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment. ProAssurance plans to adopt the guidance beginning January 1, 2020. Adoption is not
expected to have a material effect on ProAssurance’s results of operations or financial position.
Improvements to Financial Instruments - Credit Losses
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB
issued guidance that replaces the incurred loss impairment methodology, which delays recognition of credit losses until a
probable loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, credit losses are
required to be recorded through an allowance for credit losses account and the income statement reflects the measurement for
newly recognized financial assets, as well as increases or decreases of expected credit losses that have taken place during the
period. ProAssurance is in the process of evaluating the effect the new guidance would have on its results of operations and
financial position and plans to adopt the guidance beginning January 1, 2020.
144
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
2. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets
and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs
considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy
levels are defined as follows:
Level 1:
Level 2:
Level 3:
quoted (unadjusted) market prices in active markets for identical assets and liabilities. For
ProAssurance, Level 1 inputs are generally quotes for debt or equity securities actively traded in
exchange or over-the-counter markets.
market data obtained from sources independent of the reporting entity (observable inputs). For
ProAssurance, Level 2 inputs generally include quoted prices in markets that are not active, quoted
prices for similar assets or liabilities, and results from pricing models that use observable inputs such as
interest rates and yield curves that are generally available at commonly quoted intervals.
the reporting entity’s own assumptions about market participant assumptions based on the best
information available in the circumstances (non-observable inputs). For ProAssurance, Level 3 inputs
are used in situations where little or no Level 1 or 2 inputs are available or are inappropriate given the
particular circumstances. Level 3 inputs include results from pricing models for which some or all of the
inputs are not observable, discounted cash flow methodologies, single non-binding broker quotes and
adjustments to externally quoted prices that are based on management judgment or estimation.
Fair values of assets measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016 are
shown in the following tables. Where applicable, the tables also indicate the fair value hierarchy of the valuation techniques
utilized to determine those fair values. For some assets, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair
value measurement. Assessments of the significance of a particular input to the fair value measurement require judgment and
consideration of factors specific to the assets being valued.
145
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
(In thousands)
Level 1
Level 2
Level 3
Fair Value
December 31, 2017
Fair Value Measurements Using
Total
Assets:
Fixed maturities, available for sale
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt, multiple observable inputs
Corporate debt, limited observable inputs
Residential mortgage-backed securities
Agency commercial mortgage-backed securities
Other commercial mortgage-backed securities
Other asset-backed securities
Equity securities
Financial
Utilities/Energy
Consumer oriented
Industrial
Bond funds
All other
Short-term investments
Other investments
Other assets
Total assets categorized within the fair value hierarchy
LP/LLC and investment fund interests carried at NAV which
approximates fair value. These interests, reported as a part of
Investment in unconsolidated subsidiaries and Other
investments, respectively, are not categorized within the fair
value hierarchy.
Total assets at fair value
$
— $
—
—
2,371
—
—
—
—
—
133,627
20,956
632,243
1,151,084
—
196,789
10,742
15,961
97,780
76,051
54,388
54,529
53,936
156,563
75,142
404,204
607
—
$ 877,791
—
—
—
—
—
—
27,922
31,155
1,731
$ 2,319,990
$
$
133,627
— $
20,956
—
—
632,243
— 1,153,455
13,703
197,844
10,742
15,961
101,711
13,703
1,055
—
—
3,931
—
—
—
—
—
—
—
409
—
19,098
76,051
54,388
54,529
53,936
156,563
75,142
432,126
32,171
1,731
3,216,879
230,889
$ 3,447,768
146
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
(In thousands)
Assets:
Fixed maturities, available for sale
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt, multiple observable inputs
Corporate debt, limited observable inputs
Residential mortgage-backed securities
Agency commercial mortgage-backed securities
Other commercial mortgage-backed securities
Other asset-backed securities
$
Equity securities
Financial
Utilities/Energy
Consumer oriented
Industrial
Bond funds
All other
Short-term investments
Other investments
Total assets categorized within the fair value hierarchy
$
LP/LLC interests carried at NAV which approximates fair value.
These interests, reported as a part of Investment in unconsolidated
subsidiaries, are not categorized within the fair value hierarchy.
Total assets at fair value
December 31, 2016
Fair Value Measurements Using
Total
Level 1
Level 2
Level 3
Fair Value
— $
—
—
2,339
—
—
—
—
—
146,539
30,235
800,463
1,261,842
—
217,906
12,783
19,611
103,871
81,749
52,869
61,284
54,265
79,843
27,181
437,580
1,956
799,066
—
—
—
—
10,159
19,924
4,504
29,542
$ 2,657,379
$
$
146,539
— $
30,235
—
—
800,463
— 1,264,181
14,810
217,906
12,783
19,611
106,878
14,810
—
—
—
3,007
—
—
—
—
—
—
—
3
17,820
81,749
52,869
61,284
54,265
90,002
47,105
442,084
31,501
3,474,265
204,719
$ 3,678,984
The fair values for securities included in the Level 2 category, with the few exceptions described below, were developed
by one of several third party, nationally recognized pricing services, including services that price only certain types of
securities. Each service uses complex methodologies to determine values for securities and subject the values they develop to
quality control reviews. Management selected a primary source for each type of security in the portfolio and reviewed the
values provided for reasonableness by comparing data to alternate pricing services and to available market and trade data.
Values that appeared inconsistent were further reviewed for appropriateness. Any value that did not appear reasonable was
discussed with the service that provided the value and adjusted, if necessary. There were no material changes to the values
supplied by the pricing services during the years ended December 31, 2017 and 2016.
Level 2 Valuations
Below is a summary description of the valuation methodologies primarily used by the pricing services for securities in the
Level 2 category, by security type:
U.S. Treasury obligations were valued based on quoted prices for identical assets, or, in markets that are not active,
quotes for similar assets, taking into consideration adjustments for variations in contractual cash flows and yields to maturity.
U.S. Government-sponsored enterprise obligations were valued using pricing models that consider current and historical
market data, normal trading conventions, credit ratings, and the particular structure and characteristics of the security being
valued, such as yield to maturity, redemption options, and contractual cash flows. Adjustments to model inputs or model results
were included in the valuation process when necessary to reflect recent regulatory, government or corporate actions or
significant economic, industry or geographic events affecting the security’s fair value.
State and municipal bonds were valued using a series of matrices that considered credit ratings, the structure of the
security, the sector in which the security falls, yields and contractual cash flows. Valuations were further adjusted, when
necessary, to reflect the expected effect on fair value of recent significant economic or geographic events or ratings changes.
147
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Corporate debt, multiple observable inputs consisted primarily of corporate bonds, but also included a small number of
bank loans. The methodology used to value Level 2 corporate bonds was the same as the methodology previously described for
U.S. Government-sponsored enterprise obligations. Bank loans were valued based on an average of broker quotes for the loans
in question, if available. If quotes were not available, the loans were valued based on quoted prices for comparable loans or, if
the loan was newly issued, by comparison to similar seasoned issues. Broker quotes were compared to actual trade prices to
permit assessment of the reliability of the quotes; unreliable quotes were not considered in quoted averages.
Residential and commercial mortgage-backed securities were valued using a pricing matrix which considers the issuer
type, coupon rate and longest cash flows outstanding. The matrix used was based on the most recently available market
information. Agency and non-agency collateralized mortgage obligations were both valued using models that consider the
structure of the security, current and historical information regarding prepayment speeds, ratings and ratings updates, and
current and historical interest rate and interest rate spread data.
Other asset-backed securities were valued using models that consider the structure of the security, monthly payment
information, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and
historical interest rate and interest rate spread data. Spreads and prepayment speeds consider collateral type.
Equity securities were securities not traded on an exchange on the valuation date. The securities were valued using the
most recently available quotes for the securities.
Short-term investments are securities maturing within one year, carried at cost which approximated the fair value of the
security due to the short term to maturity.
Other investments consisted primarily of convertible bonds valued using a pricing model that incorporated selected
dealer quotes as well as current market data regarding equity prices and risk free rates. If dealer quotes were unavailable for the
security being valued, quotes for securities with similar terms and credit status were used in the pricing model. Dealer quotes
selected for use were those considered most accurate based on parameters such as underwriter status and historical reliability.
Other assets consisted of an interest rate cap derivative instrument valued using a model which considers the volatilities
from other instruments with similar maturities, strike prices, durations and forward yield curves.
Level 3 Valuations
Below is a summary description of the valuation processes and methodologies used as well as quantitative information
regarding securities in the Level 3 category.
Level 3 Valuation Processes
• Level 3 securities are priced by the Chief Investment Officer.
• Level 3 valuations are computed quarterly. Prices are evaluated quarterly against prior period prices and the expected
change in prices.
•
ProAssurance's Level 3 securities are primarily NRSRO rated debt instruments for which comparable market inputs
are commonly available for evaluating the securities in question. Valuation of these debt instruments is not overly
sensitive to changes in the unobservable inputs used.
148
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Level 3 Valuation Methodologies
Corporate debt, limited observable inputs consisted of corporate bonds valued using dealer quotes for similar securities
or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities
of comparable credit quality that have like terms and payment features. Assessments of credit quality were based on NRSRO
ratings, if available, or were subjectively determined by management if not available. At December 31, 2017 and 2016, 84% of
the securities were rated and the average rating was BBB+.
Residential mortgage-backed and other asset-backed securities consisted of securitizations of receivables valued using
dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities.
Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments
of credit quality were based on NRSRO ratings, if available, or were subjectively determined by management if not available.
At December 31, 2017, 21% of the securities were rated and the average rating was AAA. At December 31, 2016, no securities
were rated.
Other investments consisted of convertible securities for which limited observable inputs were available at December 31,
2017 and December 31, 2016. The securities were valued internally based on expected cash flows, including the expected final
recovery, discounted at a yield that considered the lack of liquidity and the financial status of the issuer.
Quantitative Information Regarding Level 3 Valuations
Fair Value at
(In thousands)
December 31,
2017
December 31,
2016
Valuation Technique
Unobservable
Input
Range
(Weighted Average)
Assets:
Corporate debt, limited
observable inputs
$13,703
$14,810
Market Comparable
Securities
Discounted Cash Flows
Residential mortgage-backed
and other asset-backed
securities
$4,986
$3,007
Market Comparable
Securities
Discounted Cash Flows
Other investments
$409
$3
Discounted Cash Flows
Comparability
Adjustment
Comparability
Adjustment
Comparability
Adjustment
Comparability
Adjustment
Comparability
Adjustment
0% - 5% (2.5%)
0% - 5% (2.5%)
0% - 5% (2.5%)
0% - 5% (2.5%)
0% - 10% (5%)
The significant unobservable inputs used in the fair value measurement of the above listed securities were the valuations
of comparable securities with similar issuers, credit quality and maturity. Changes in the availability of comparable securities
could result in changes in the fair value measurements.
149
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Fair Value Measurements - Level 3 Assets
The following tables (the Level 3 Tables) present summary information regarding changes in the fair value of assets
measured at fair value using Level 3 inputs.
December 31, 2017
Level 3 Fair Value Measurements – Assets
State and
Municipal
Bonds
$
— $
Corporate
Debt
14,810
Asset-backed
Securities
$
3,007
Other
investments
3
$
Total
17,820
$
—
—
—
—
—
—
—
— $
(163)
13
(369)
13,016
(4,837)
999
(9,766)
13,703
$
—
—
(71)
2,627
—
—
(577)
4,986
$
—
(143)
140
—
(912)
1,321
—
409
$
(163)
(130)
(300)
15,643
(5,749)
2,320
(10,343)
19,098
— $
— $
— $
— $
—
$
$
December 31, 2016
Level 3 Fair Value Measurements – Assets
State and
Municipal
Bonds
$
— $
Corporate
Debt
14,500
Asset-backed
Securities
$
757
Other
investments
$
— $
Total
15,257
—
(490)
—
—
(410)
900
—
— $
(93)
(75)
531
8,900
(3,837)
—
(5,116)
14,810
$
—
—
8
6,500
(1,452)
1,000
(3,806)
3,007
$
(9)
—
47
1,753
(1,550)
918
(1,156)
3
$
(102)
(565)
586
17,153
(7,249)
2,818
(10,078)
17,820
— $
— $
— $
— $
—
(In thousands)
Balance December 31, 2016
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income
Net realized investment gains (losses)
Included in other comprehensive income
Purchases
Sales
Transfers in
Transfers out
Balance December 31, 2017
Change in unrealized gains (losses) included in
earnings for the above period for Level 3 assets held
at period-end
(In thousands)
Balance December 31, 2015
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income
Net realized investment gains (losses)
Included in other comprehensive income
Purchases
Sales
Transfers in
Transfers out
Balance December 31, 2016
Change in unrealized gains (losses) included in earnings
for the above period for Level 3 assets held at period-
end
$
$
150
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Transfers
Equity securities of approximately $35.4 million and $10.2 million were transferred from Level 2 to Level 1 during the
years ended December 31, 2017 and 2016, respectively.
Transfers shown in the preceding Level 3 tables were as of the end of the quarter in which the transfer occurred. All
transfers during both 2017 and 2016 were to or from Level 2, with the exception of one security that was transfered to Level 1
during 2016.
All transfers during 2017 and 2016 related to securities held for which the level of market activity for identical or nearly
identical securities varies from period to period. The securities were valued using multiple observable inputs when those inputs
were available; otherwise the securities were valued using limited observable inputs.
Fair Values Not Categorized
Investment in unconsolidated subsidiaries at both December 31, 2017 and December 31, 2016 included interests in
investment fund LPs/LLCs and other investments at December 31, 2017 included interests in certain investment funds that
measure fund assets at fair value on a recurring basis and that provide a NAV for the interest. The carrying value of these
interests is based on the NAV provided and was considered to approximate the fair value of the interests. In accordance with
GAAP, the fair value of these investments was not classified within the fair value hierarchy. Additional information regarding
these investments is as follows:
(In thousands)
Investments in LPs/LLCs:
Private debt funds (1)
Long equity fund (2)
Long/short equity funds (3)
Non-public equity funds (4)
Multi-strategy fund of funds (5)
Structured credit fund (6)
Long/short commodities fund (7)
Strategy focused fund (8)
Other investments:
Mortgage fund (9)
Unfunded
Commitments
December 31,
2017
Fair Value
December 31,
2017
December 31,
2016
$
$
$
5,005
None
None
77,626
None
None
None
4,304
None
$
$
42,206
7,847
31,352
100,062
9,100
6,561
13,025
606
55,637
6,268
28,926
89,691
8,448
4,273
11,476
—
20,130
230,889
$
—
204,719
$
(1) The investment is comprised of interests in two unrelated LP funds that are structured to provide interest distributions
primarily through diversified portfolios of private debt instruments. One LP allows redemption by special consent; the
other does not permit redemption. Income and capital are to be periodically distributed at the discretion of the LPs over
an anticipated time frame that spans from three to eight years.
(2) The fund is a LP that holds long equities of public international companies. Redemptions are allowed at the end of any
calendar month with a prior notice requirement of 15 days and are paid within 10 days of the end of the calendar month
of the redemption request.
(3) The investment is comprised of interests in multiple unrelated LP funds. The funds hold primarily long and short North
American equities and target absolute returns using strategies designed to take advantage of market opportunities. The
funds generally permit quarterly or semi-annual capital redemptions subject to notice requirements of 30 to 90 days. For
some funds, redemptions above specified thresholds (lowest threshold is 90%) may be only partially payable until after a
fund audit is completed and are then payable within 30 days.
(4) The investment is comprised of interests in multiple unrelated LP funds, each structured to provide capital appreciation
through diversified investments in private equity, which can include investments in buyout, venture capital, debt
including senior, second lien and mezzanine, distressed debt and other private equity-oriented LPs. Two of the LPs allow
redemption by terms set forth in the LP agreements; the others do not permit redemption. Income and capital are to be
periodically distributed at the discretion of the LP over time frames that are anticipated to span up to nine years.
151
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
(5) This fund is a LLC structured to build and manage low volatility, multi-manager portfolios that have little or no
correlation to the broader fixed income and equity security markets. Redemptions are not permitted but offers to
repurchase units of the LLC may be extended periodically.
(6) This fund is a LP seeking to obtain superior risk-adjusted absolute returns by acquiring and actively managing a
diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments. Redemptions are
allowed at any quarter-end with a prior notice requirement of 90 days.
(7) This fund is a LLC invested across a broad range of commodities and focuses primarily on market neutral, relative value
strategies, seeking to generate absolute returns with low correlation to broad commodity, equity and fixed income
markets. Following an initial one-year lock-up period, redemptions are allowed with a prior notice requirement of 30
days and are payable within 30 days.
(8) This fund is a LLC focused on investing in consumer products companies. The fund will invest in North American
companies, comprised of equity and equity-related securities, as well as debt instruments. Redemptions are not
permitted.
(9) This investment fund is focused on the structured mortgage market. The fund will primarily invest in U.S. Agency
mortgage-backed securities. Redemptions are allowed at the end of any calendar quarter with a prior notice requirement
of 65 days and are paid within 45 days at the end of the redemption dealing day.
ProAssurance may not sell, transfer or assign its interest in any of the above LPs/LLCs without special consent from the
LP/LLC.
Nonrecurring Fair Value Measurement
At December 31, 2017, ProAssurance held an equity method early stage business investment measured at fair value on a
nonrecurring basis due to a recognized OTTI of $8.5 million. The investment was valued using significant unobservable inputs
(Level 3) and had a fair value of $1.2 million at December 31, 2017. The fair value of the investment was measured as
ProAssurance's ownership percentage in the projected earnings and cash flows expected to be generated by the investment. At
December 31, 2016, ProAssurance did not have any assets or liabilities that were measured at fair value on a nonrecurring
basis.
Financial Instruments - Methodologies Other Than Fair Value
The following table provides the estimated fair value of our financial instruments that, in accordance with GAAP for the
type of investment, are measured using a methodology other than fair value. All fair values provided primarily fall within the
Level 3 fair value category.
(In thousands)
Financial assets:
BOLI
Other investments
Other assets
Financial liabilities:
Senior notes due 2023*
Revolving Credit Agreement*
Mortgage loans*
Other liabilities
* Carrying value excludes debt issuance costs
December 31, 2017
December 31, 2016
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
$
$
$
$
$
$
62,113
58,546
34,020
250,000
123,000
40,460
21,154
$
$
$
$
$
$
$
62,113
69,095
33,742
273,153
123,000
40,460
21,154
$
$
$
$
$
$
$
60,134
50,391
29,111
$
$
$
250,000
200,000
$
$
— $
$
17,033
60,134
58,757
28,960
270,898
200,000
—
17,011
The fair value of the BOLI was equal to the cash surrender value associated with the policies on the valuation date.
Other investments listed in the table above include interests in certain investment fund LPs/LLCs accounted for using the
cost method, investments in FHLB common stock carried at cost and an annuity investment carried at amortized cost. The
estimated fair value of the LP/LLC interests was based on the equity value of the interest provided by the LP/LLC managers for
the most recent quarter, which approximates the fair value of the interest. Two of ProAssurance's insurance subsidiaries are
members of an FHLB. The estimated fair value of the FHLB common stock was based on the amount the subsidiaries would
152
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
receive if their memberships were canceled, as the memberships cannot be sold. The fair value of the annuity represents the
present value of the expected future cash flows discounted using a rate available in active markets for similarly structured
instruments.
Other assets and other liabilities primarily consisted of related investment assets and liabilities associated with funded
deferred compensation agreements. The fair value of the funded deferred compensation assets was based upon quoted market
prices. The deferred compensation liabilities are adjusted to match the fair value of the deferred compensation assets. Other
assets also included a secured note receivable and unsecured note receivable under two separate line of credit agreements. Fair
value of these notes receivable was based on the present value of expected cash flows from the notes receivable, discounted at
market rates on the valuation date for receivables with similar credit standings and similar payment structures.
The fair value of the debt was estimated based on the present value of expected future cash outflows, discounted at rates
available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance.
153
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
3. Investments
Available-for-sale securities at December 31, 2017 and December 31, 2016 included the following:
Fixed maturities
(In thousands)
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Residential mortgage-backed securities
Agency commercial mortgage-backed securities
Other commercial mortgage-backed securities
Other asset-backed securities
Fixed maturities
(In thousands)
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Residential mortgage-backed securities
Agency commercial mortgage-backed securities
Other commercial mortgage-backed securities
Other asset-backed securities
Amortized
Cost
$
134,323
21,089
618,414
1,157,660
196,741
10,827
16,004
102,130
$ 2,257,188
Amortized
Cost
$
146,186
30,038
790,154
1,264,812
216,285
12,837
19,571
106,938
$ 2,586,821
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
485
73
14,248
15,205
2,438
23
91
47
32,610
$
$
1,181
206
419
5,707
1,335
108
134
466
9,556
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
1,264
388
17,261
22,659
3,667
89
177
207
45,712
$
$
911
191
6,952
8,480
2,046
143
137
267
19,127
$
$
$
$
Estimated Fair
Value
$
133,627
20,956
632,243
1,167,158
197,844
10,742
15,961
101,711
$ 2,280,242
Estimated Fair
Value
$
146,539
30,235
800,463
1,278,991
217,906
12,783
19,611
106,878
$ 2,613,406
154
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
The recorded cost basis and estimated fair value of available-for-sale fixed maturities at December 31, 2017, by
contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment penalties.
(In thousands)
Fixed maturities, available for sale
U.S. Treasury obligations
U.S. Government-sponsored
enterprise obligations
State and municipal bonds
Corporate debt
Residential mortgage-backed
securities
Agency commercial mortgage-
backed securities
Other commercial mortgage-
backed securities
Other asset-backed securities
Amortized
Cost
Due in one
year or less
Due after
one year
through
five years
Due after
five years
through
ten years
Due after
ten years
Total Fair
Value
$ 134,323
$
24,284
$
85,173
$
21,203
$
2,967
$ 133,627
21,089
618,414
1,157,660
196,741
10,827
16,004
102,130
$ 2,257,188
249
48,925
87,973
8,277
206,946
680,773
12,290
274,994
372,952
140
101,378
25,460
20,956
632,243
1,167,158
197,844
10,742
15,961
101,711
$ 2,280,242
Excluding obligations of the U.S. Government, U.S. Government-sponsored enterprises and a U.S. Government
obligations money market fund, no investment in any entity or its affiliates exceeded 10% of Shareholders’ equity at
December 31, 2017.
Cash and securities with a carrying value of $46.2 million at December 31, 2017 were on deposit with various state
insurance departments to meet regulatory requirements. ProAssurance also held securities with a carrying value of $159.7
million at December 31, 2017 that are pledged as collateral security for advances under the Revolving Credit Agreement (see
Note 9 for additional detail on the Revolving Credit Agreement).
As a member of Lloyd's and a capital provider to Syndicate 1729 and Syndicate 6131, which began active operations on
January 1, 2018, ProAssurance is required to maintain capital at Lloyd's, referred to as FAL. ProAssurance investments at
December 31, 2017 included fixed maturities with a fair value of $123.5 million and short term investments with a fair value of
approximately $0.4 million on deposit with Lloyd's in order to satisfy these FAL requirements.
BOLI
ProAssurance holds BOLI policies that are carried at the current cash surrender value of the policies (original cost $33
million). All insured individuals were members of ProAssurance management at the time the policies were acquired. The
primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies.
ProAssurance is the owner and beneficiary of these policies.
155
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Investment in Unconsolidated Subsidiaries
ProAssurance holds investments in unconsolidated subsidiaries, accounted for under the equity method. The investments
include the following:
(In thousands)
Equity method investments:
December 31, 2017
Carrying Value
Percentage
Ownership
December 31,
2017
December 31,
2016
Qualified affordable housing project tax
credit partnerships
Other tax credit partnerships
All other investments, primarily LPs/LLCs
See below
See below
See below
$
$
84,607
$
102,313
6,118
239,866
330,591
$
11,459
227,134
340,906
Qualified affordable housing project tax credit partnership interests held by ProAssurance generate investment returns by
providing tax benefits to fund investors in the form of tax credits and project operating losses. The carrying value of these
investments reflects ProAssurance's total commitments (both funded and unfunded) to the partnerships, less any amortization.
ProAssurance's ownership percentage relative to two of the tax credit partnership interests is almost 100%; these interests had a
carrying value of $32.5 million at December 31, 2017. ProAssurance's ownership percentage relative to the remaining tax credit
partnership interests is less than 20%; these interests had a carrying value of $52.1 million at December 31, 2017. Since
ProAssurance has the ability to exert influence over the partnerships but does not control them, all are accounted for using the
equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 13.
Other tax credit partnerships are comprised entirely of historic tax credits. The historic tax credits generate investment
returns by providing benefits to fund investors in the form of tax credits, tax deductible project operating losses and positive
cash flows. The carrying value of these investments reflects ProAssurance's total funded commitments less any amortization.
ProAssurance's ownership percentage relative to the tax credit partnerships is almost 100%. Since ProAssurance has the ability
to exert influence over the partnerships but does not control them, all are accounted for using the equity method. See further
discussion of the entities in which ProAssurance holds passive interests in Note 13.
As discussed in additional detail in Note 2, ProAssurance holds interests in certain LPs/LLCs that are investment funds
which measure fund assets at fair value on a recurring basis and the fund managers provide a NAV for the interest. The carrying
value of these interests is based on the NAV provided, and is considered to approximate the fair value of the interests; such
interests totaled $210.8 million at December 31, 2017 and $204.7 million at December 31, 2016. ProAssurance also holds
interests in other equity method investments and LPs/LLCs which are not considered to be investment funds; such interests
totaled $29.1 million at December 31, 2017 and $22.4 million at December 31, 2016.
ProAssurance's ownership percentage relative to three of the LPs/LLCs is greater than 25%, which is expected to be
reduced as the funds mature and other investors participate in the funds; these investments had a carrying value of $30.8 million
at December 31, 2017 and $18.5 million at December 31, 2016. ProAssurance's ownership percentage relative to the remaining
equity method investments and LPs/LLCs is less than 25%; these interests had a carrying value of $209.1 million at
December 31, 2017 and $208.6 million at December 31, 2016. ProAssurance does not have the ability to exert control over any
of these funds.
Other Investments
Other investments at December 31, 2017 and December 31, 2016 were comprised as follows:
(In thousands)
December 31,
2017
December 31,
2016
Investments in LPs/LLCs, at cost
Convertible securities, at fair value
Investment funds, at fair value
Other, principally FHLB capital stock, at cost or
amortized cost
$
$
55,058
32,171
20,130
3,488
110,847
$
$
46,852
31,501
—
3,539
81,892
156
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Investments in convertible securities are carried at fair value as permitted by the accounting guidance for hybrid financial
instruments, with changes in fair value recognized in income as a component of net realized investment gains (losses) during
the period of change.
Investment funds measure fund assets at fair value on a recurring basis and the fund managers provide a NAV for the
interest. The carrying value of these interests is based on the NAV provided, and is considered to approximate the fair value of
the interests, with changes in fair value recognized in income as a component of net realized investment gains (losses) during
the period of change.
FHLB capital stock is not marketable but may be liquidated by terminating membership in the FHLB. The liquidation
process can take up to five years.
Investments Held in a Loss Position
The following tables provide summarized information with respect to investments held in an unrealized loss position at
December 31, 2017 and December 31, 2016, including the length of time the investment had been held in a continuous
unrealized loss position.
(In thousands)
Fixed maturities, available for sale
U.S. Treasury obligations
U.S. Government-sponsored
enterprise obligations
State and municipal bonds
Corporate debt
Residential mortgage-backed
securities
Agency commercial mortgage-
backed securities
Other commercial mortgage-
backed securities
Other asset-backed securities
Total
Unrealized
December 31, 2017
Less than 12 months
Fair
Unrealized
12 months or longer
Fair
Unrealized
Loss
Value
Loss
Value
Loss
Fair
Value
$ 110,788
$
1,181
$
67,135
$
554
$
43,653
$
627
17,032
23,122
487,578
109,659
206
419
5,707
1,335
10,182
15,168
365,541
64,121
4,423
108
2,458
64
102
2,730
402
34
6,850
7,954
122,037
45,538
1,965
12,878
85,358
$ 850,838
$
134
466
9,556
7,939
70,924
$ 603,468
$
82
346
4,314
4,939
14,434
$ 247,370
$
142
317
2,977
933
74
52
120
5,242
157
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
(In thousands)
Fixed maturities, available for sale
U.S. Treasury obligations
U.S. Government-sponsored
enterprise obligations
State and municipal bonds
Corporate debt
Residential mortgage-backed
securities
Agency commercial mortgage-
backed securities
Other commercial mortgage-backed
securities
Other asset-backed securities
Total
December 31, 2016
Less than 12 months
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
12 months or longer
Fair
Value
Unrealized
Loss
$
79,833
$
911
$
79,833
$
911
$
— $
—
11,746
224,884
469,632
191
6,952
8,480
11,746
219,276
424,721
103,680
2,046
100,542
4,579
143
4,192
191
6,444
5,662
1,982
114
—
5,608
44,911
3,138
387
—
508
2,818
64
29
9,822
44,343
$ 948,519
$
137
267
19,127
9,179
39,079
$ 888,568
$
134
256
15,694
$
643
5,264
59,951
$
3
11
3,433
As of December 31, 2017, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were
629 debt securities (26.5% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing
375 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.4 million
and $0.3 million, respectively. The securities were evaluated for OTTI as of December 31, 2017.
As of December 31, 2016, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were
703 debt securities (27.2% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing
456 issuers. The greatest and second greatest unrealized loss positions among those securities were each approximately $0.5
million. The securities were evaluated for OTTI as of December 31, 2016.
Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds
in an unrealized loss position have suffered an OTTI. A detailed discussion of the factors considered in the assessment is
included in Note 1.
Fixed maturity securities held in an unrealized loss position at December 31, 2017, excluding asset-backed securities,
have paid all scheduled contractual payments and are expected to continue doing so. Expected future cash flows of asset-backed
securities, excluding those issued by GNMA, FNMA and FHLMC, held in an unrealized loss position were estimated as part of
the December 31, 2017 OTTI evaluation using the most recently available six-month historical performance data for the
collateral (loans) underlying the security or, if historical data was not available, sector based assumptions, and equaled or
exceeded the current amortized cost basis of the security.
Net Investment Income
Net investment income by investment category was as follows:
(In thousands)
2017
2016
2015
Year Ended December 31
Fixed maturities
Equities
Other investments, including Short-term
BOLI
Investment fees and expenses
Net investment income
$
$
75,669
17,198
7,793
1,979
(6,977)
95,662
$
$
85,818
14,887
3,402
2,008
(6,103)
100,012
$
$
97,348
13,317
2,049
2,053
(6,107)
108,660
158
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax
credit investments and historic tax credit investments. The losses recorded reflect ProAssurance's allocable portion of
partnership operating losses. Losses from qualified affordable housing project tax credit investments were $14.3 million, $20.0
million and $10.1 million and tax credits recognized related to these investments totaled $17.8 million, $18.5 million and $18.4
million for the years ended December 31, 2017, 2016 and 2015, respectively. Losses from historic tax credit investments were
$6.4 million, $4.8 million and $0.2 million and tax credits recognized related to these investments totaled $5.3 million, $9.0
million and $4.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. Tax credits recognized reduced
income tax expense in the respective periods.
Net Realized Investment Gains (Losses)
Realized investment gains and losses are recognized on the first-in, first-out basis. The following table provides detailed
information regarding net realized investment gains (losses):
(In thousands)
Total OTTI losses:
State and municipal bonds
Corporate debt
Investment in unconsolidated subsidiaries
Other investments
Portion of OTTI losses recognized in other comprehensive income
before taxes:
Corporate debt
Net impairment losses recognized in earnings
Gross realized gains, available-for-sale securities
Gross realized (losses), available-for-sale securities
Net realized gains (losses), Short-term investments
Net realized gains (losses), trading securities
Net realized gains (losses), Other investments
Change in unrealized holding gains (losses), trading securities
Change in unrealized holding gains (losses), Other investments,
carried at fair value
Other
Net realized investment gains (losses)
Year Ended December 31
2017
2016
2015
$
(850) $
(419)
(11,931)
—
(100) $
(7,604)
—
(3,130)
—
(11,781)
—
(8,136)
248
(12,952)
6,653
(3,123)
(2)
10,724
2,963
11,243
1,068
(9,766)
12,451
(7,038)
18
6,632
1,115
30,557
4,572
(15,345)
11,936
(11,481)
(1)
1,080
464
(28,343)
896
7
16,409
$
899
7
34,875
(896)
947
$ (41,639)
$
During 2017, ProAssurance recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related
to an early stage business investment accounted for under the equity method. The impairment charge represented the difference
between the investment's carrying value and fair value, which was measured as ProAssurance's ownership percentage in the
projected earnings expected to be generated by the investment. In addition, ProAssurance recognized OTTI in earnings of $3.4
million related to qualified affordable housing project tax credit investments. The current estimated tax benefits expected to be
received from ProAssurance's allocable portion of the operating losses of the underlying properties have declined, due to the
newly enacted corporate tax rate of 21%, as compared to those at the time the investments were acquired. During 2017,
ProAssurance also recognized credit-related OTTI of $0.2 million and non-credit OTTI of $0.2 million in OCI, both of which
related to corporate bonds.
During 2016, ProAssurance recognized OTTI in earnings of $9.8 million, including credit-related OTTI of $5.5 million
related to debt instruments from ten issuers in the energy sector. The fair value of the bonds and the credit quality of the issuers
had declined during 2016 and ProAssurance recognized credit-related OTTI to reduce the amortized cost basis of the bonds to
the present value of future cash flows expected to be received from the bonds. During 2016, ProAssurance also recognized non-
credit OTTI of $0.9 million in OCI related to certain of these same bonds, as the fair value of the bonds was less than the
present value of the expected future cash flows from the securities.
159
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
During 2015, ProAssurance recognized OTTI in earnings of $15.3 million, including credit-related OTTI of $4.9 million
related to debt instruments from six issuers in the energy sector. The fair value of the bonds and the credit quality of the issuers
had declined during 2015 and ProAssurance recognized credit-related OTTI to reduce the amortized cost basis of the bonds to
the present value of future cash flows expected to be received from the bonds. During 2015, ProAssurance also recognized non-
credit OTTI of $3.7 million in OCI related to certain of these same bonds, as the fair value of the bonds was less than the
present value of the expected future cash flows from the securities. ProAssurance also recognized an OTTI in earnings during
2015 related to a bond intended to be sold.
ProAssurance also recognized a $3.1 million and an $8.1 million OTTI in earnings during 2016 and 2015, respectively,
related to an investment fund that is accounted for using the cost method (classified as part of other investments). The fund is
focused on the energy sector and securities held by the fund declined in value during both 2016 and 2015. OTTI was recognized
to reduce ProAssurance's carrying value of the investment to the NAV reported by the fund.
During 2015, ProAssurance recognized net losses relative to trading securities primarily due to reductions in market
valuations during the period.
The following table presents a roll forward of cumulative credit losses recorded in earnings related to impaired debt
securities for which a portion of the OTTI was recorded in OCI.
(In thousands)
Balance January 1
Additional credit losses recognized during the period, related to
securities for which:
2017
2016
2015
$
1,158
$
5,751
$
232
No OTTI has been previously recognized
OTTI has been previously recognized
Reductions due to:
Securities sold during the period (realized)
Balance December 31
171
—
2,398
2,154
3,648
2,645
(16)
1,313
$
(9,145)
1,158
$
(774)
5,751
$
Other information regarding sales and purchases of available-for-sale securities is as follows:
Proceeds from sales (exclusive of maturities and paydowns)
(In millions)
Purchases
Year Ended December 31
2017
2016
2015
$
$
530.2 $
614.4 $
361.8 $
636.4 $
481.8
580.6
160
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
4. Reinsurance
ProAssurance purchases reinsurance from third-party reinsurers and insurance enterprises in order to reduce its net
exposure to losses, to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the
higher limit coverages the Company offers and as a mechanism for providing custom insurance solutions. ProAssurance also
uses reinsurance arrangements as a mechanism for sharing risk with insureds or their affiliates.
The effects of reinsurance for the years ended December 31, 2017, 2016 and 2015 were as follows:
(In thousands)
Direct
Assumed
Ceded
Net premiums written
Direct
Assumed
Ceded
Net premiums earned
Losses and loss adjustment expenses
Reinsurance recoveries
Net losses and loss adjustment expenses
Year Ended December 31
2017
842,968
31,908
(110,858)
764,018
821,249
27,629
(110,347)
738,531
592,218
(123,060)
469,158
$
$
$
$
$
$
$
$
$
$
$
$
2016
794,377
40,637
(96,481)
738,533
790,791
37,805
(95,315)
733,281
515,242
(72,013)
443,229
2015
780,982
31,236
(102,933)
709,285
772,968
22,691
(101,510)
694,149
456,862
(46,151)
410,711
$
$
$
$
$
$
The receivable from reinsurers on unpaid losses and loss adjustment expenses represents management’s estimate of
amounts that will be recoverable under ProAssurance reinsurance agreements. Most Company reinsurance agreements base the
amount of premium that is due to the reinsurer in part on losses reimbursed or to be reimbursed under the agreement, and terms
may also include maximum and minimum amounts of ceded premium. Ceded premium amounts are estimated based on
management’s expectation of ultimate losses and the portion of those losses that are allocable to reinsurers according to the
terms of the agreements, including any minimums or maximums. Given the uncertainty of the ultimate amounts of losses,
management’s estimates of losses and related amounts recoverable may vary significantly from the eventual outcome. During
the years ended December 31, 2017, 2016 and 2015 ProAssurance reduced premiums ceded by $1.2 million, $7.1 million and
$1.1 million, respectively, due to changes in management’s estimates of amounts due to reinsurers related to prior accident year
loss recoveries.
Reinsurance contracts do not relieve ProAssurance from its obligations to policyholders and ProAssurance remains liable
to its policyholders whether or not reinsurers honor their contractual obligations. ProAssurance continually monitors its
reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.
At December 31, 2017, the net total amounts due from reinsurers was $345.1 million (including receivables related to
paid and unpaid losses and LAE and prepaid reinsurance premiums, less reinsurance premiums payable). No single reinsurer
had an individual balance which exceeded $29.0 million.
At December 31, 2017 reinsurance recoverables totaling approximately $64.1 million were collateralized by letters of
credit or funds withheld. ProAssurance had no allowance for credit losses related to its reinsurance receivables at December 31,
2017 or 2016 as all reinsurance balances were considered collectible. During the year ended December 31, 2017, reinsurance
balances written off for credit reasons were nominal in amount. During the years ended December 31, 2016 and 2015 no
reinsurance balances were written off for credit reasons.
During 2017, ProAssurance commuted an outstanding DDR reinsurance arrangement with one of its reinsurers which
resulted in a net cash receipt of approximately $7.8 million and reduced its receivable from reinsurers on unpaid losses and loss
adjustment expenses by approximately $5.4 million.
During 2017 and 2016, ProAssurance commuted the 2015 and 2014 calendar year quota share reinsurance arrangements,
respectively, between the Specialty P&C segment and Syndicate 1729 which resulted in a net cash receipt of approximately
$6.3 million and $6.8 million, respectively. The commutations reduced the receivable from reinsurers on unpaid losses and loss
adjustment expenses, combined, by approximately $6.6 million and $7.1 million, during the years ended December 31, 2017
and 2016, respectively.
There were no significant reinsurance commutations in 2015.
161
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
During 2016, ProAssurance entered into a novation agreement which represents a legal replacement of one insurer by
another extinguishing the ceding entity's liability to the policyholder. The novation resulted in approximately $11.8 million of
one-time assumed premium which was fully earned at the inception of the agreement as all of the underlying loss events
covered by the policy occurred in the past.
5. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of ProAssurance’s deferred
tax assets and liabilities were as follows:
Deferred tax assets
(In thousands)
Unpaid loss discount
Unearned premium adjustment
Compensation related
Intangibles
Foreign NOL
Total gross deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities
Deferred policy acquisition costs
Unrealized gains on investments, net
Fixed assets
Basis differentials–investments
Intangibles
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
Year Ended December 31
2017
2016
$
$
20,368
14,449
11,467
514
4,116
50,914
(4,116)
46,798
(6,333)
(5,166)
(826)
(10,397)
(12,548)
(1,598)
(36,868)
9,930
$
$
39,746
22,847
20,190
1,001
1,962
85,746
(1,962)
83,784
(9,754)
(9,797)
(1,291)
(25,512)
(22,067)
(5,107)
(73,528)
10,256
ProAssurance had $21.7 million of available NOL carryforwards at December 31, 2017 related to the Company's U.K.
operations which may be carried forward indefinitely. At December 31, 2017 and 2016, ProAssurance established a deferred tax
asset related to the NOL carryforwards of $4.1 million and $2.0 million, respectively. In 2017 and 2016, management evaluated
the realizability of the deferred tax asset related to the NOL carryforwards and concluded that it was more likely than not that
the deferred tax asset will not be realized; therefore, a valuation allowance was recorded against the full value of the deferred
tax asset in both 2017 and 2016. The increase in the valuation allowance and related deferred tax asset in 2017 as compared to
2016 of $2.2 million was due to losses recognized in the Lloyd's Syndicate segment during 2017 primarily due to Hurricanes
Harvey, Irma and Maria. As the valuation allowance has become more significant in 2017, ProAssurance began presenting the
gross deferred tax asset related to the NOL carryforwards separately from the related valuation allowance in the table above.
Prior year amounts have been reclassified to conform to the current year presentation.
ProAssurance had no available capital loss carryforwards, or Alternative Minimum Tax credit carryforwards as of
December 31, 2017.
ProAssurance files income tax returns in various states, the U.S. federal jurisdiction and the U.K. ProAssurance had a
liability for U.S. federal and U.K. income taxes of $8.0 million at December 31, 2017 and $5.1 million at December 31, 2016,
both carried as a part of other liabilities.
The statute of limitations is now closed for all tax years prior to 2014.
162
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2017, 2016 and 2015, were as
follows:
(In thousands)
2017
2016
2015
Balance at January 1
Increases for tax positions taken during the current year
(Decreases) for tax positions taken during the current year
Increases for tax positions taken during prior years
(Decreases) relating to a lapse of the applicable statute of
limitations
Balance at December 31
$
$
$
8,353
—
(3,500)
700
(212)
5,341
$
$
8,195
361
—
—
(203)
8,353
$
577
7,618
—
—
—
8,195
At December 31, 2017 and 2016, approximately $1.3 million and $1.0 million, respectively, of ProAssurance's uncertain
tax positions, if recognized, would affect the effective tax rate. As with any uncertain tax position, there is a possibility that the
ultimate benefit realized could differ from the estimate management has established. Management believes that it is reasonably
possible that a portion of unrecognized tax benefits at December 31, 2017, may change during the next twelve months.
However, an estimate of the change cannot be made at this time.
ProAssurance recognizes interest and/or penalties related to income tax matters in income tax expense. Interest
recognized in the income statement was approximately $0.3 million and $0.2 million for the years ended December 31, 2017
and 2016, respectively, and was nominal for the year ended December 31, 2015. The accrued liability for interest was
approximately $0.5 million at December 31, 2017 and $0.2 million at December 31, 2016.
Income tax expense (benefit) for each of the years ended December 31, 2017, 2016 and 2015 consisted of the following:
(In thousands)
2017
2016
2015
Provision for income taxes
Current expense (benefit)
Federal and foreign
State
Total current expense (benefit)
Deferred expense (benefit)
Federal and foreign
State
Total deferred expense (benefit)
$
19,546
$
15,857
$
27,653
120
19,666
1,331
362
1,693
729
16,586
8,284
250
8,534
999
28,652
(15,185)
(809)
(15,994)
12,658
Total income tax expense (benefit)
$
21,359
$
25,120
$
A reconciliation of “expected” income tax expense (benefit) (35% of income before income taxes) to actual income tax
expense (benefit) for each of the years ended December 31, 2017, 2016 and 2015 were as follows:
(In thousands)
2017
2016
2015
Computed “expected” tax expense
Tax-exempt income
Tax credits
Non-U.S. operating results
Excess tax benefit on share-based compensation
Change in federal corporate tax rate
Change in limitation of future deductibility of
certain executive compensation
Other
Total income tax expense (benefit)
$
$
45,018
(8,356)
(23,111)
918
(2,762)
6,541
3,497
(386)
21,359
$
$
61,670
(9,917)
(27,549)
(1,688)
—
—
—
2,604
$
25,120
$
45,099
(12,913)
(22,407)
720
—
—
—
2,159
12,658
163
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Tax Cuts and Jobs Act
The TCJA was signed into law on December 22, 2017 and contains several key provisions that impact the Company's
business, including the reduction of the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, the
reduction in the amount of executive compensation that could qualify as a tax deduction, a minimum tax on payments made to
related foreign entities and a change in how property and casualty taxpayers discount loss reserves. Under current accounting
guidance, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted.
However, due to the timing of the enactment of the TCJA and its proximity to December 31, 2017, the SEC issued SAB 118
which provides a framework for companies to account for uncertainties in applying the provisions of the TCJA. SAB 118
allows companies to record a provisional amount in situations where a company does not have the necessary information
available but can make a reasonable estimate. In situations where companies cannot make a reasonable estimate due to various
factors, including lack of information, a provisional amount is not recorded. Instead, companies will continue to apply current
accounting guidance based on the provision of the tax laws that were in effect immediately prior to the TCJA being enacted.
The measurement period, as defined in SAB 118 for the TCJA, begins on the enactment date of the TCJA and ends when a
company has obtained, prepared and analyzed the information that was needed in order to complete the accounting
requirements under current accounting guidance. However, under no circumstances will the measurement period extend beyond
one year from the enactment date of the TCJA.
Other than the areas discussed below, ProAssurance was able to complete the accounting under the new provisions of the
TCJA for the remeasurement of the Company's deferred tax assets and liabilities based on the newly enacted tax rate and
recognized a charge of $6.5 million, which is included as a component of income tax expense from continuing operations for
the year ended December 31, 2017.
Provisional amount
At December 31, 2017, ProAssurance had not completed the accounting for the tax effects of enactment of the TCJA for
certain areas of the Company's tax provision. ProAssurance has made a reasonable estimate of the effects on its existing
deferred tax asset balances at December 31, 2017 as it relates to the limitation on the future deductibility of certain executive
compensation and recorded a provisional charge of $3.5 million, which is included as a component of income tax expense from
continuing operations for the year ended December 31, 2017. Any future guidance from the IRS addressing the effects of the
TCJA on executive compensation could result in a change to this provisional amount.
Provisional amount not reasonably estimable
The TCJA requires property and casualty taxpayers to discount loss reserves based solely on IRS factors and no longer by
reference to historical payment patterns. As the IRS has yet to release the 2018 discount factors, ProAssurance has been unable
to reasonably estimate the impact of the change in loss reserve discounting factors and therefore has not adjusted its deferred
tax balances at December 31, 2017 for the impact of these changes due to the TCJA. As prescribed by SAB 118, ProAssurance
continues to utilize the discount factors based on existing accounting guidance and the provisions of the tax laws that were in
effect immediately prior to enactment of the TCJA. Once the IRS has released the 2018 loss reserve discount factors,
ProAssurance will complete the its analysis and include the effect of the difference in the reserve discount factors in the period
the analysis is complete or the impact is reasonably estimable.
6. Deferred Policy Acquisition Costs
Policy acquisition costs that are incremental and directly related to the successful production of new and renewal
insurance contracts, most significantly agent commissions, premium taxes, and underwriting salaries and benefits, are
capitalized as policy acquisition costs and amortized to expense, net of ceding commissions earned, as the related premium
revenues are earned.
Amortization of DPAC was $95.8 million, $88.4 million and $79.6 million for the years ended December 31, 2017, 2016
and 2015, respectively.
164
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
7. Reserve for Losses and Loss Adjustment Expenses
The reserve for losses is established based on estimates of individual claims and actuarially determined estimates of
future losses based on ProAssurance’s past loss experience, available industry data and projections as to future claims
frequency, severity, inflationary trends and settlement patterns. Estimating the reserve, particularly the reserve appropriate for
liability exposures, is a complex process. Claims may be resolved over an extended period of time, often five years or more,
and may be subject to litigation. Estimating losses requires ProAssurance to make and revise judgments and assessments
regarding multiple uncertainties over an extended period of time. As a result, the reserve estimate may vary considerably from
the eventual outcome. The assumptions used in establishing ProAssurance’s reserve are regularly reviewed and updated by
management as new data becomes available. Changes to estimates of previously established reserves are included in earnings in
the period in which the estimate is changed.
ProAssurance believes that the methods it uses to establish reserves are reasonable and appropriate. Each year,
ProAssurance uses internal actuaries to review the reserve for losses of each insurance subsidiary. ProAssurance also engages
consulting actuaries to review ProAssurance claims data and provide observations regarding cost trends, rate adequacy and
ultimate loss costs. ProAssurance considers the views of the actuaries as well as other factors, such as known, anticipated or
estimated changes in frequency and severity of claims, loss retention levels and premium rates, in establishing the amount of its
reserve for losses. The statutory filings of each insurance company with the insurance regulators must be accompanied by a
consulting actuary's certification as to their respective reserves.
ProAssurance partitions its reserve by accident year, which is the year in which the claim becomes its liability. As claims
are incurred (reported) and claim payments are made, they are aggregated by accident year for analysis purposes. ProAssurance
also partitions its reserve by reserve type: case reserves and IBNR reserves. Case reserves are established by the claims
department based upon the particular circumstances of each reported claim and represent ProAssurance’s estimate of the future
loss costs (often referred to as expected losses) that will be paid on reported claims. Case reserves are decremented as claim
payments are made and are periodically adjusted upward or downward as estimates regarding the amount of future losses are
revised; a reported loss for an individual claim equates to the case reserve at any point in time plus the claim payments that
have been made to date. IBNR reserves represent an estimate, in the aggregate, of future development on losses that have been
reported to ProAssurance plus an estimate of losses that have been incurred but not reported. IBNR reserves are not estimated
directly, but are calculated by subtracting claim payments to-date and case reserves as of the evaluation date from the projected
ultimate losses which are determined as described below.
Development of Prior Accident Years
In addition to setting the initial reserve for the current accident year, each period ProAssurance reassesses the amount of
reserve required for prior accident years. The foundation of ProAssurance’s reserve re-estimation process is an actuarial
analysis that is performed by both the internal and consulting actuaries. This detailed analysis projects ultimate losses based on
partitions which include line of business, geography, coverage layer and accident year. The procedure uses the most
representative data for each partition, capturing its unique patterns of development and trends. In all, there are 200 different
partitions of ProAssurance's business for purposes of this analysis. ProAssurance believes that the use of consulting actuaries
provides an independent view of the loss data as well as a broader perspective on industry loss trends.
Reserving Methodologies
For the HCPL, medical technology and workers’ compensation lines of business, the analysis performed by the consulting
actuaries analyzes each partition of the business in a variety of ways and uses multiple actuarial methodologies in performing
these analyses, including: Bornhuetter-Ferguson (Paid and Reported) Method, Paid Development Method, Reported
Development Method, Average Paid Value Method, Average Reported Value Method, Backward Recursive Development
Method, the Adjusted Reported and the Adjusted Paid Methods. Generally, methods such as the Bornhuetter-Ferguson method
are used on more recent accident years where there is less data available on which to base the analysis. As time progresses and
an increased amount of data is available for a given accident year, management gives more confidence to the development and
average methods, as these methods typically rely more heavily on ProAssurance's own historical data. These methods
emphasize different aspects of loss reserve estimation and provide a variety of perspectives for ProAssurance's decisions.
For the workers’ compensation line of business, ProAssurance utilizes the Reported Development Method, Paid Loss
Development Method and Bornhuetter-Ferguson, to develop the reserve for each accident year. The actuarial review includes
the stratification of claims data (lost time claims and medical only claims) using different variations that allow for identification
of trends that may not be readily identifiable if the data was evaluated only in the aggregate. Reported and paid loss
development factors are key assumptions in the reserve estimation process and are based on ProAssurance’s historical reported
165
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
and paid loss development patterns. As accident years mature, the various actuarial methodologies produce more consistent loss
estimates.
For the Lloyd’s Syndicate business, given the immaturity of Syndicate 1729’s own experience, losses are initially
estimated using the loss assumptions by risk category incorporated into the business plan submitted to Lloyd’s with
consideration given to loss experience incurred to date. These assumptions were influenced by loss results reflected in Lloyd’s
historical data for similar risks. As losses are reported and resolved and Syndicate 1729's experience becomes more credible
from a statistical perspective, Syndicate 1729's actual loss experience is incorporated into the estimates.
Certain of the methodologies utilized to estimate the ultimate losses for each partition of the reserve consider the actual
amounts paid. Paid data is particularly influential when a large portion of known claims have been closed, as is the case for
older accident years. In selecting a point estimate for each partition, management considers the extent to which trends are
emerging consistently for all partitions and known industry trends. Thus, actual, rather than estimated severity trends are given
more consideration. If actual severity trends are lower than those estimated at the time that reserves were previously
established, the recognition of favorable development is indicated. This is particularly true for older accident years where
actuarial methodologies give more weight to actual loss costs (severity).
The various actuarial methods discussed above are applied in a consistent manner from period to period. In addition,
ProAssurance performs statistical reviews of claims data such as claim counts, average settlement costs and severity trends
when establishing the reserve.
Selected point estimates of ultimate losses are utilized to develop estimates of ultimate losses recoverable from reinsurers,
based on the terms and conditions of ProAssurance’s reinsurance agreements. An overall estimate of the amount receivable
from reinsurers is determined by combining the individual estimates. ProAssurance’s net reserve estimate is the gross reserve
point estimate less the estimated reinsurance recovery.
Activity in the reserve for losses and loss adjustment expenses is summarized as follows:
Balance, beginning of year
(In thousands)
2017
1,993,428
$
2016
2015
$
2,005,326
$
2,058,266
Less reinsurance recoverables on unpaid losses and loss
adjustment expenses
Net balance, beginning of year
Net losses:
Current year
Favorable development of reserves established in
prior years, net
Total
Paid related to:
Current year
Prior years
Total paid
Net balance, end of year
273,475
1,719,953
249,350
1,755,976
237,966
1,820,300
603,518
587,007
571,891
(134,360)
469,158
(143,778)
443,229
(161,180)
410,711
(106,633)
(369,682)
(476,315)
1,712,796
(96,190)
(383,062)
(479,252)
1,719,953
(84,186)
(390,849)
(475,035)
1,755,976
Plus reinsurance recoverables on unpaid losses and loss
adjustment expenses
Balance, end of year
335,585
273,475
249,350
$
2,048,381
$
1,993,428
$
2,005,326
As discussed in Note 1, estimating liability reserves is complex and requires the use of many assumptions. As time passes
and ultimate losses for prior years are either known or become subject to a more precise estimation, ProAssurance increases or
decreases the reserve estimates established in prior periods. The favorable loss development recognized in 2017 primarily
reflected a lower than anticipated claims severity trend (i.e. the average size of a claim) for accident years 2010 through 2014.
The favorable development recognized in 2016 and 2015 was primarily due to lower than anticipated claims severity trends for
accident years 2009 through 2013 and accident years 2007 through 2011, respectively.
On January 1, 2016, ProAssurance adopted new guidance that requires detailed disclosures related to its reserve for losses
and loss adjustment expenses, including significant changes in methodologies and assumptions used in the calculation of its
reserve. ProAssurance establishes its reserve and manages claims activity by coverage, product or line of business and various
166
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
categories of reserves have similar characteristics. Therefore, ProAssurance has aggregated these reserve categories into several
reserve groups that provide a more meaningful view of the amount, timing and uncertainty of cash flows arising from the
liability. At the same time, these reserve groups present a disaggregated view of the major elements of the overall loss reserve
liability. The reserve groups include HCPL claims-made reserve, HCPL occurrence reserve, medical technology liability
claims-made reserve, workers’ compensation reserve, Lloyd’s casualty reserve, Lloyd's property insurance reserve and Lloyd's
property reinsurance reserve. All other loss reserve categories are deemed to be less homogeneous or relatively small on a
standalone basis and are included in other short-duration lines in the claims development reconciliation.
The composition of the reserve groups is based on similar characteristics with respect to the risks being insured and the
reporting and payout pattern of the underlying claims. In most instances the groups follow the coverage categorizations used in
statutory financial reporting for U.S.-domiciled property-casualty insurance companies. HCPL claims are disaggregated into
those claims covered by claims-made policies and those claims covered by occurrence policies. For claims-made policies, the
insured event generally becomes a liability when the event is first reported to the insurer. For occurrence policies, the insured
event becomes a liability when the event takes place, even if unknown at that time. Claims-made coverage has a short reporting
pattern, with virtually all claims known shortly after the end of the policy period. Occurrence coverage claims can have an
extended reporting pattern, with the time from the loss event until the filing of the claim often measured in years, at which point
the claims resolution process begins. Although the resolution process and time frame is similar once a claim is reported,
combining claims from claims-made and occurrence coverage types would result in distortion due to the difference in reporting
lag.
Medical technology liability reserves are grouped separately due to the nature of the risk, including the potential for mass
torts and multiple claims arising out of the same product or service. The small amount of medical technology liability
occurrence reserves are included in other short-duration lines. Workers' compensation claims are also grouped separately due to
the difference in the type of coverage provided and the differences in the claims resolution process as compared to other
liability insurance. Finally, claims arising from the Lloyd’s Syndicate are segregated into casualty (insurance and reinsurance),
property insurance and property reinsurance groups. Property insurance claims generally have a shorter reporting and resolution
time frame as compared to most casualty claims. The reporting and resolution patterns of property reinsurance claims differs
from that of property insurance claims due to predominant coverage of catastrophic loss events on an aggregate basis rather
than coverage of individual claims. Casualty reinsurance, on the other hand, generally provides coverage on a per-claim basis
and the reporting and resolution time frame for these claims is not substantially different than those arising from casualty
insurance written by the Lloyd's Syndicate.
ProAssurance has elected to present reserve history for acquired entities in all periods shown in the tables below,
including periods prior to acquisition. With the exception of the workers' compensation line of business, virtually all other
acquired entities are captured within the HCPL line of business.
All information prior to 2017 disclosed in the Incurred Claims and Allocated Claim Adjustment Expenses, Net of
Reinsurance, Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance and Average Annual
Percentage Payout of Incurred Claims by Age, Net of Reinsurance tables that follow is presented as supplementary information.
The “Cumulative Number of Reported Claims” in the tables that follow includes the combined number of claims for an
accident year and excludes projected unreported IBNR claims. A claim is considered reported when ProAssurance becomes
aware of and accepts it for coverage under the terms of the Company's insurance contracts.
Healthcare Professional Liability Reserve
HCPL loss costs are impacted by many factors, including but not limited to the nature of the claim, including whether or
not the claim is an individual or a mass tort claim, the personal situation of the claimant or the claimant's family, the outcome of
jury trials, the legislative and judicial climate where any potential litigation may occur, general economic conditions and, for
claims involving bodily injury, the trend of healthcare costs. ProAssurance sets an initial reserve using the average loss ratio
used in pricing, plus an additional provision in consideration of the historical loss volatility ProAssurance and others in the
industry have experienced. The average initial loss ratio for the HCPL business has approximated 90% for recent years, which
is higher than the underlying expected loss ratio and provision for volatility. The reasons for the variability in loss provisions
from period to period have included additional loss activity within ProAssurance’s surplus lines business, provisions for losses
in excess of policy limits, adjustments to unallocated loss adjustment expenses, adjustments to the reserve for the DDR
provisions in ProAssurance's policies and additional losses recorded for particular exposures, such as mass torts. These specific
adjustments are made if ProAssurance believes the results for a given accident year are likely to exceed those anticipated by
pricing. ProAssurance believes the use of a provision for volatility appropriately considers the inherent risks and limitations of
the rate development process and the historic volatility of professional liability losses and produces a reasonable best estimate
of the reserve required to cover actual ultimate unpaid losses.
167
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Healthcare Professional Liability Claims-Made
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2017
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Year Ended December 31
Unaudited
$ 402,293 $ 397,571 $ 391,214 $ 345,855 $ 298,849 $ 269,462 $ 259,272 $ 247,123 $ 240,472 $
240,877
— $ 379,259 $ 370,642 $ 345,714 $ 320,368 $ 284,511 $ 265,478 $ 246,146 $ 230,849
— $ 364,996 $ 354,787 $ 338,170 $ 312,813 $ 291,553 $ 279,713 $ 270,484
— $ 348,916 $ 344,808 $ 331,884 $ 305,540 $ 289,400 $ 278,258
— $ 341,289 $ 324,418 $ 319,613 $ 306,956 $ 291,075
— $ 315,346 $ 304,209 $ 296,550 $ 287,140
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 290,020 $ 289,397 $ 280,043
267,442
$ (3,635)
—
—
—
— $ 276,492 $ 269,980
271,138
$ (15,351)
—
—
— $ 271,765
274,643
$ (7,499)
—
—
283,746
$ 119,172
$ 2,637,810
IBNR*
$
$
$
$
$
$
889
(592)
190
731
(429)
1,422
224,768
258,466
264,777
279,589
272,364
Cumulative
Number of
Reported
Claims
3,737
3,826
3,846
3,532
3,707
3,807
3,352
3,307
3,398
3,217
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Unaudited
$ 14,214 $ 67,971 $ 128,800 $ 166,544 $ 197,042 $ 212,789 $ 221,150 $ 226,903 $ 232,598 $
234,704
— $ 15,051 $ 71,272 $ 114,318 $ 153,563 $ 178,445 $ 191,420 $ 200,425 $ 205,372
—
—
—
—
—
—
—
—
— $ 15,464 $ 69,551 $ 137,712 $ 180,432 $ 209,777 $ 221,693 $ 236,171
—
—
—
—
—
—
—
— $ 14,417 $ 71,208 $ 133,004 $ 177,089 $ 198,112 $ 214,502
—
—
—
—
—
—
— $ 15,382 $ 73,571 $ 145,488 $ 190,997 $ 215,220
—
—
—
—
—
— $ 16,938 $ 69,657 $ 127,496 $ 171,681
—
—
—
—
— $ 16,764 $ 59,485 $ 116,791
—
—
—
— $
9,172 $ 55,731
—
—
— $
9,027
—
—
209,016
240,945
224,982
231,652
197,265
154,236
111,741
51,869
16,309
1,672,719
14,660
$
979,751
($ in thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
(In thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
168
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Healthcare Professional Liability Occurrence
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2017
($ in thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Year Ended December 31
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
$ 42,258 $ 45,006 $ 47,019 $ 43,676 $ 35,458 $ 29,492 $ 28,887 $ 26,126 $ 23,473 $
21,710
$
976
— $ 34,450 $ 35,366 $ 36,802 $ 37,437 $ 34,099 $ 32,675 $ 28,731 $ 26,340
24,572
$ 1,794
—
—
—
—
—
—
—
—
— $ 41,721 $ 43,238 $ 43,195 $ 42,233 $ 37,920 $ 35,831 $ 33,361
29,338
$ 3,014
—
—
—
—
—
—
—
— $ 45,882 $ 44,956 $ 41,453 $ 39,917 $ 37,150 $ 35,004
32,343
$ 4,240
—
—
—
—
—
—
— $ 45,703 $ 46,513 $ 44,848 $ 40,692 $ 34,774
32,691
$ 5,573
—
—
—
—
—
— $ 32,746 $ 36,602 $ 35,624 $ 34,393
30,906
$ 3,797
—
—
—
—
— $ 30,420 $ 29,918 $ 32,143
29,869
$ 8,234
—
—
—
— $ 35,648 $ 35,347
37,346
$ 10,172
—
—
— $ 29,609
28,790
$ 21,178
—
—
24,571
$ 28,886
283
246
290
343
396
355
340
315
245
129
$
292,136
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Unaudited
$
70 $
1,048 $
3,347 $
6,269 $ 10,649 $ 12,403 $ 15,661 $ 16,564 $ 17,799 $
17,808
— $
175 $
2,255 $
5,067 $
7,947 $ 10,823 $ 13,248 $ 15,380 $ 16,025
—
—
—
—
—
—
—
—
— $
285 $
1,881 $
5,647 $
9,120 $ 15,147 $ 21,837 $ 22,804
—
—
—
—
—
—
—
— $
291 $
2,803 $
8,059 $ 16,544 $ 19,197 $ 21,416
—
—
—
—
—
—
— $
363 $
2,430 $
7,705 $ 12,212 $ 19,275
—
—
—
—
—
— $
369 $
3,170 $
7,826 $ 14,753
—
—
—
—
— $
394 $
2,260 $
7,460
—
—
—
— $
(350) $
786
—
—
— $
(182)
—
—
(In thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
16,270
23,313
23,194
21,435
16,787
10,519
4,854
(195)
(6,809)
127,176
11,693
$
176,653
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
Unaudited
7
8
9
10
Healthcare Professional Liability Claims-Made
5.4%
19.8% 22.9% 16.1% 10.2%
5.8%
Healthcare Professional Liability Occurrence
(2.3%)
5.6%
13.8% 15.7% 14.8% 10.8%
4.3%
8.1%
2.1%
2.8%
2.0%
3.3%
0.9%
—%
169
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Medical Technology Liability Reserve
The risks insured in the medical technology liability line of business are more varied and policies are individually priced
based on the risk characteristics of the policy and the account. These policies often have substantial deductibles or self-insured
retentions and the insured risks range from startup operations to large multinational entities. Premiums are established using the
most recently developed actuarial estimates of losses expected to be incurred based on factors which include: results from prior
analysis of similar business, industry indications, observed trends and judgment. Claims in this line of business primarily
involve bodily injury to individuals and are affected by factors similar to those of the HCPL line of business. For the medical
technology liability line of business, ProAssurance also establishes an initial reserve using a loss ratio approach, including a
provision in consideration of historical loss volatility that this line of business has exhibited.
Medical Technology Liability Claims-Made
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2017
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Year Ended December 31
Unaudited
$ 43,427 $ 45,788 $ 48,187 $ 45,156 $ 42,409 $ 37,783 $ 38,280 $ 35,330 $ 34,716 $
34,441
— $ 30,462 $ 31,183 $ 27,523 $ 26,181 $ 23,425 $ 21,733 $ 20,551 $ 19,264
— $ 26,077 $ 27,063 $ 25,175 $ 23,307 $ 19,315 $ 17,439 $ 16,047
IBNR*
$
$
$
463
474
627
18,176
16,878
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 17,249 $ 20,930 $ 19,166 $ 15,836 $ 13,794 $ 12,487
12,358
$ 1,050
—
—
—
—
—
—
— $ 11,162 $
9,989 $
8,906 $
7,441 $
5,824
4,797
$ 1,029
—
—
—
—
—
— $
9,807 $
9,955 $
9,536 $
7,226
4,697
$ 1,337
—
—
—
—
— $
9,989 $ 10,306 $
9,012
8,984
$ 4,127
—
—
—
— $
9,376 $
8,757
7,193
$ 4,363
—
—
— $
9,200
8,467
$ 5,725
—
—
11,049
$ 10,366
$
127,040
Cumulative
Number of
Reported
Claims
943
699
497
521
220
218
272
154
180
82
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Unaudited
$
4,325 $ 14,772 $ 26,901 $ 26,620 $ 32,653 $ 34,588 $ 34,567 $ 34,567 $ 34,567 $
34,567
— $
116 $
5,071 $
7,742 $ 14,675 $ 14,933 $ 15,097 $ 15,184 $ 15,186
—
—
—
—
—
—
—
—
— $
485 $
3,557 $
8,491 $ 12,283 $ 11,725 $ 12,146 $ 12,253
—
—
—
—
—
—
—
— $
118 $
2,034 $
3,846 $
5,062 $
7,376 $
7,240
—
—
—
—
—
—
— $
568 $
1,520 $
2,805 $
3,247 $
3,366
—
—
—
—
—
— $
102 $
1,029 $
1,967 $
2,599
—
—
—
—
— $
388 $
1,527 $
2,564
—
—
—
— $
—
—
25 $
— $
—
440
53
—
16,515
15,366
7,799
3,676
3,092
3,046
1,625
1,690
56
87,432
1,162
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
40,770
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Unaudited
Medical technology liability
3.7% 18.7% 21.1% 14.0%
7.9%
2.9%
1.4%
6.2%
3.7% —%
170
($ in thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
(In thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Workers' Compensation Reserve
Many factors affect the ultimate losses incurred for the workers' compensation coverages including, but not limited to, the
type and severity of the injury, the age and occupation of the injured worker, the estimated length of disability, medical
treatment and related costs, and the jurisdiction and workers' compensation laws of the injury occurrence. ProAssurance uses
various actuarial methodologies in developing the workers’ compensation reserve combined with a review of the exposure base
generally based upon payroll of the insured. For the current accident year, given the lack of seasoned information, the different
actuarial methodologies produce results with considerable variability; therefore, more emphasis is placed on supplementing
results from the actuarial methodologies with trends in exposure base, medical expense inflation, general inflation, severity, and
claim counts, among other things, to select an expected loss ratio.
Workers' Compensation
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2017
($ in thousands)
Year Ended December 31
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Accident Year
Unaudited
$ 52,155 $ 55,507 $ 55,090 $ 54,885 $ 54,950 $ 57,722 $ 57,928 $ 56,676 $ 57,239 $
— $ 62,255 $ 60,802 $ 60,351 $ 60,413 $ 62,731 $ 63,942 $ 63,398 $ 62,631
— $ 75,699 $ 74,196 $ 73,647 $ 72,742 $ 72,278 $ 72,504 $ 71,684
— $ 84,074 $ 84,762 $ 90,769 $ 91,491 $ 90,993 $ 91,149
— $ 102,044 $ 96,884 $ 95,716 $ 95,204 $ 94,627
— $ 111,268 $ 111,730 $ 114,171 $ 115,115
— $ 120,443 $ 121,128 $ 121,206
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 135,960 $ 132,408
126,636
$ 12,731
—
—
— $ 138,546
131,000
$ 30,355
—
—
142,363
$ 59,622
$ 1,012,554
* Includes expected development on reported claims
IBNR*
$
$
$
$
$
$
$
51
143
469
535
1,140
1,269
3,724
57,239
62,631
71,642
91,390
94,319
115,556
119,778
Cumulative
Number of
Reported
Claims
13,836
13,091
15,960
18,778
20,151
20,577
21,179
22,139
21,947
21,880
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Unaudited
$ 15,246 $ 35,879 $ 45,998 $ 51,256 $ 54,050 $ 55,697 $ 56,305 $ 56,582 $ 56,727 $
57,051
— $ 19,575 $ 42,122 $ 52,428 $ 57,971 $ 60,445 $ 61,150 $ 61,951 $ 62,052
—
—
—
—
—
—
—
—
— $ 26,353 $ 51,766 $ 61,612 $ 67,095 $ 69,050 $ 70,049 $ 70,308
—
—
—
—
—
—
—
— $ 27,863 $ 64,874 $ 79,432 $ 85,743 $ 88,129 $ 89,040
—
—
—
—
—
—
— $ 34,574 $ 70,179 $ 82,953 $ 88,350 $ 91,291
—
—
—
—
—
— $ 38,125 $ 82,320 $ 100,522 $ 107,019
—
—
—
—
— $ 40,268 $ 87,768 $ 103,771
—
—
—
— $ 43,112 $ 86,553
—
—
— $ 39,199
—
—
62,130
70,588
89,768
92,382
110,496
111,799
102,702
81,038
43,973
821,927
2,908
All outstanding liabilities before 2008, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
193,535
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Unaudited
Workers' Compensation
32.3% 36.7% 14.9%
7.2%
3.4%
1.5%
0.9%
0.3%
0.2%
0.6%
171
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
(In thousands)
Accident Year
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Lloyd's Syndicate Reserve
Given the recent inception date for Syndicate 1729 (January 1, 2014) there is limited reliable historical claims data to use
in establishing initial reserves for the exposures in the Lloyd's Syndicate segment. Consequently, ProAssurance estimates initial
losses using the loss assumptions by risk category incorporated into the business plan submitted to Lloyd’s with consideration
given to loss experience incurred to date. These assumptions are influenced by loss results in Lloyd's historical data for similar
risks. In addition, Lloyd's market data for payment patterns is utilized to develop the payout patterns in the tables shown below.
As the book of business matures and additional loss information becomes available, the actual loss experience of Syndicate
1729's book of business will be utilized to a greater extent. This will occur sooner for property coverages than for casualty
coverages due to the shorter claim reporting and resolution time described above.
Claim count information for assumed reinsurance coverage written by Syndicate 1729 is not meaningful in many
instances. Certain reinsurance contracts provide aggregate coverage for loss events involving numerous underlying claims,
resulting in a single claim count for reinsurance purposes, while other reinsurance contracts provide individual per-claim
coverage. Still others may provide aggregate stop loss coverage based on the total losses or loss ratio of a class of business. As a
result, claim count information is not included in the Lloyd’s Syndicate Casualty and Lloyd’s Syndicate Property Reinsurance
tables shown below.
Syndicate 1729 writes coverage in a variety of jurisdictions and currencies, although the majority of its business is in U.S.
dollars. For purposes of the tables below, ProAssurance has elected to convert losses from their original currency to U.S. dollars
using the exchange rate as of the end of the current period. This provides the purest trend information with respect to loss
development, since the amounts in the table are not affected by exchange rate movements. However, the amounts for prior
periods shown in the tables for prior periods will not reconcile to previously-issued financial statements which used existing
exchange rates at the date of the financial statement.
Lloyd's Syndicate Casualty
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2017
($ in thousands)
Accident Year
2014
2015
2016
2017
Total
$
Year Ended December 31
2014
2015
Unaudited
2016
2017
IBNR(1)
Cumulative Number
of Reported
Claims(2)
6,121 $
— $
—
—
5,823 $
14,859 $
— $
—
5,620 $
14,557
19,622
—
$
$
$
$
$
5,557
14,445
19,756
22,056
61,814
1,145
2,981
8,248
16,083
nm
nm
nm
nm
(1) Includes expected development on reported claims
(2) The abbreviation "nm" indicates that the information is not meaningful
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)
Accident Year
2014
2015
2016
2017
Total
$
Year Ended December 31
2014
2015
Unaudited
2016
2017
20 $
— $
—
—
476 $
726 $
— $
—
4,103 $
6,316
2,502
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
4,227
10,331
8,460
2,615
25,633
—
36,181
172
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Lloyd's Syndicate Property Insurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2017
($ in thousands)
Accident Year
2014
2015
2016
2017
Total
$
Year Ended December 31
2014
2015
Unaudited
2016
2017
IBNR*
Cumulative Number
of Reported Claims
892 $
— $
—
—
1,091 $
5,540 $
— $
—
890 $
5,940
11,942
—
$
$
$
$
$
866
6,221
13,223
15,005
35,315
1,145
2,981
8,248
16,083
118
893
2,268
2,723
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)
Accident Year
2014
2015
2016
2017
Total
$
Year Ended December 31
2014
2015
Unaudited
2016
2017
267 $
— $
—
—
1,007 $
3,172 $
— $
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
838 $
4,032
7,769
—
$
$
856
4,822
11,219
7,996
24,893
—
10,422
173
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Lloyd's Syndicate Property Reinsurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2017
($ in thousands)
Accident Year
2014
2015
2016
2017
Total
$
Year Ended December 31
2014
2015
Unaudited
2016
2017
IBNR(1)
Cumulative
Number of
Reported Claims (2)
836 $
— $
—
—
934 $
2,803 $
— $
—
995 $
2,840
4,517
—
$
$
$
$
$
994
2,287
4,063
6,888
14,232
(1)
(186)
1,873
2,073
nm
nm
nm
nm
(1) Includes expected development on reported claims
(2) The abbreviation "nm" indicates that the information is not meaningful
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)
Accident Year
2014
2015
2016
2017
Total
$
Year Ended December 31
2014
2015
Unaudited
2016
2017
79 $
— $
—
—
920 $
1,324 $
— $
—
988 $
1,819
617
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
988
2,013
1,689
4,158
8,848
—
5,384
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
Unaudited
7
8
9
10
Lloyd's Syndicate Casualty
Lloyd's Syndicate Property Insurance
Lloyd's Syndicate Property Reinsurance
24.7% 49.4% 16.7%
80.8% 15.5%
78.6% 16.4%
2.5%
2.8%
6.0%
0.6%
1.6%
2.0%
0.3%
0.4%
0.4%
0.1%
0.2%
0.4% —%
0.1% —%
0.1% —%
—%
—%
—%
—%
—%
—%
174
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Below is a reconciliation of the claims development information to the Consolidated Balance Sheet:
(In thousands)
December 31, 2017
Net outstanding liabilities
Healthcare professional liability claims-made
Healthcare professional liability occurrence
Medical technology liability claims-made
Workers' compensation
Lloyd's syndicate casualty
Lloyd's syndicate property insurance
Lloyd's syndicate property reinsurance
Other short-duration lines
$
979,751
176,653
40,770
193,535
36,181
10,422
5,384
92,212
Liabilities for losses and loss adjustment expenses, net of reinsurance
1,534,908
Reinsurance recoverable on unpaid losses
Healthcare professional liability claims-made
Healthcare professional liability occurrence
Medical technology liability claims-made
Workers' compensation
Lloyd's syndicate casualty
Lloyd's syndicate property insurance
Lloyd's syndicate property reinsurance
Other short-duration lines
Total reinsurance recoverable on unpaid losses and loss adjustment expenses
Reserve for the future utilization of the DDR benefit
Unallocated loss adjustment expenses
Purchase accounting
Other
140,159
25,960
44,458
79,800
—
13,889
20,670
10,649
335,585
75,400
106,531
3,102
(7,145)
177,888
Gross liability for losses and loss adjustment expenses
$
2,048,381
8. Commitments and Contingencies
ProAssurance is involved in various legal actions related to insurance policies and claims handling including, but not
limited to, claims asserted by policyholders. These types of legal actions arise in the Company’s ordinary course of business
and, in accordance with GAAP for insurance entities, are considered as a part of the Company’s loss reserving process, which is
described in detail under the heading "Losses and Loss Adjustment Expenses” in the Accounting Policies section of Note 1.
ProAssurance has funding commitments primarily related to non-public investment entities totaling approximately $164.6
million. Of these funding commitments, $1.2 million is related to qualified affordable housing project tax credit investments
and is expected to be paid as follows: $0.3 million in 2018, $0.3 million in 2019 and 2020 combined, $0.5 million in 2021 and
2022 combined and $0.1 million thereafter.
As a member of Lloyd's, ProAssurance is required to provide capital to support its Lloyd's Syndicates through 2022 of up
to $200.0 million, referred to as FAL. At December 31, 2017, ProAssurance is satisfying the FAL requirement with investment
securities on deposit with Lloyd's with a carrying value of $123.9 million (see Note 3).
ProAssurance has issued an unconditional revolving credit agreement to the Premium Trust Fund of Syndicate 1729 for
the purpose of providing working capital. Permitted borrowings are £20.0 million under an amended Syndicate Credit
Agreement executed in April 2016. Under the amended Syndicate Credit Agreement advances bear interest at 3.8% annually,
and may be repaid at any time but are repayable upon demand after December 31, 2019. As of December 31, 2017, the unused
175
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
commitment under the Syndicate Credit Agreement approximated £6.0 million (approximately $8.1 million as of December 31,
2017).
ProAssurance is involved in a number of operating leases primarily for office space and office equipment. The following
is a schedule of future minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 2017.
Operating Leases
(In thousands)
$
5,021
4,508
3,777
3,353
2,530
9,212
2018
2019
2020
2021
2022
Thereafter
ProAssurance incurred rent expense of $6.7 million, $5.9 million and $5.1 million in the years ended December 31, 2017,
Total minimum lease payments
$
28,401
2016 and 2015, respectively.
9. Debt
ProAssurance’s outstanding debt consisted of the following:
(In thousands)
Senior Notes due 2023, unsecured, interest at 5.3% annually
Revolving Credit Agreement, outstanding borrowings are fully secured, see Note 3,
and carried at a weighted average interest rate of 1.91% and 1.35%, respectively.
The interest rate on the borrowings is set at the time the respective borrowing is
initiated or renewed. The current borrowings can be repaid or renewed in the first
quarter of 2018. If renewed, the interest rate will be reset.
Mortgage Loans, outstanding borrowings are secured by first priority liens on two
office buildings, and bear an interest rate of three-month LIBOR plus 1.325%
(2.86% at December 31, 2017) determined on a quarterly basis.
Total principal
Less debt issuance costs
Debt less debt issuance costs
Senior Notes due 2023 (the Senior Notes)
December 31,
2017
250,000
$
December 31,
2016
250,000
$
123,000
200,000
40,460
413,460
1,649
411,811
$
$
—
450,000
1,798
448,202
$
$
The Senior Notes are the unsecured obligations of ProAssurance Corporation, due in full in November 2023, unless
redeemed sooner, with interest payable semiannually. Redemptions may be made prior to maturity, in whole or part, at the
greater of par or the sum of the present values of the outstanding principal and remaining interest payments calculated at 40
basis points above the then current rate for U.S. Treasury Notes with a term comparable to the remaining term of the Senior
Notes. There are no financial covenants associated with the Senior Notes.
Revolving Credit Agreement
ProAssurance has entered into a Revolving Credit Agreement with seven participating lenders with an expiration date of
June 2020. The Revolving Credit Agreement permits ProAssurance to borrow, repay and reborrow from the lenders during the
term of the Revolving Credit Agreement; aggregate outstanding borrowings are not permitted to exceed $250 million at any
time, which includes $50 million made available for use, if subscribed successfully, under an accordion feature. All borrowings
are required to be repaid prior to the expiration date of the Revolving Credit Agreement. ProAssurance is required to pay a
commitment fee, ranging from 12.5 to 25 basis points based on ProAssurance’s credit ratings, on the average unused portion of
the credit line during the term of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement may be
176
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
secured or unsecured and accrue interest at a selected base rate, adjusted by a margin, which can vary from 0 to 163 basis
points, based on ProAssurance’s credit ratings and whether the borrowing is secured or unsecured. The base rate selected may
either be the current one-, three- or six-month LIBOR, with the LIBOR term selected fixing the interest period for which the
rate is effective. If no selection is made, the base rate defaults to the highest of (1) the Prime rate (2) the Federal Funds rate plus
50 basis points or (3) the one month LIBOR plus 100 basis points, determined daily. Rates are reset each successive interest
period until the borrowing is repaid.
The Revolving Credit Agreement contains customary representations, covenants and events constituting default, and
remedies for default. Additionally, the Revolving Credit Agreement carries the following financial covenants:
(1) ProAssurance is not permitted to have a leverage ratio of Consolidated Funded Indebtedness (principally, obligations for
borrowed money, obligations evidenced by instruments such as notes or acceptances, standby and commercial Letters of
Credit, and contingent obligations) to Consolidated Total Capitalization (principally, total non-trade liabilities on a
consolidated basis plus consolidated shareholders’ equity, exclusive of AOCI) greater than 0.35 to 1.0, determined at the
end of each fiscal quarter.
(2) ProAssurance is required to maintain a minimum net worth, excluding AOCI, of at least $1.3 billion.
Funds borrowed under the terms of the Revolving Credit Agreement will be used for general corporate purposes,
including, but not limited to, use as short-term working capital, funding for share repurchases as authorized by the Board and
for support of other activities ProAssurance enters into in the normal course of business.
Mortgage Loans
During the fourth quarter of 2017, two of ProAssurance's subsidiaries each entered into ten-year mortgage loans
collectively totaling $40.5 million (Mortgage Loans) with one lender in connection with the recapitalization of two office
buildings. The Mortgage Loans, which mature in December 2027, accrue interest at three-month LIBOR plus 132.5 basis points
with principal and interest payable on a quarterly basis. To manage the Company's exposure to increases in LIBOR on the
Mortgage Loans, ProAssurance entered into an interest rate cap agreement with a notional amount of $35.0 million. Per the
interest rate cap agreement, the Company is entitled to receive cash payments if and when the three-month LIBOR exceeds 235
basis points. Additional information on the Company's derivative instruments is provided in Note 10.
The Mortgage Loans contain customary representations, covenants and events constituting default, and remedies for
default. Additionally, the Mortgage Loans carry the following financial covenant:
(1) Each of the two ProAssurance subsidiaries are not permitted to have a leverage ratio of Consolidated Funded Debt
(principally, obligations for borrowed money, obligations for deferred purchase price of property or services,
obligations evidenced by notes, bonds, debentures, standby and commercial Letters of Credit and contingent obligations
of the subsidiary) to Consolidated Total Capitalization (principally, SAP Consolidated Net Worth plus Consolidated
Funded Debt of the subsidiary) greater than 0.35, determined at the end of each fiscal quarter.
At December 31, 2017, contractual maturities of the Mortgages Loans for each of the next five years, excluding interest
payments, are as follows:
(In thousands)
Principal Payments Due
by Period
$
2018
2019
2020
2021
2022
Thereafter
Total principal payments $
1,396
1,448
1,503
1,559
1,617
32,937
40,460
Covenant Compliance
ProAssurance is currently in compliance with all covenants.
177
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
10. Derivatives
ProAssurance is exposed to certain risks relating to its ongoing business and investment activities. ProAssurance utilizes
derivative instruments as part of its risk management strategy to reduce the market risk related to fluctuations in future interest
rates associated with certain of its variable-rate debt. As of December 31, 2017, ProAssurance has not designated any derivative
instruments as hedging instruments and does not use derivative instruments for trading purposes.
During the fourth quarter of 2017, ProAssurance entered into an interest rate cap agreement with the objective of reducing
the Company's exposure to interest rate risk related to its variable-rate Mortgage Loans. Additional information regarding the
Company's Mortgage Loans is provided in Note 9. Under the terms of the interest rate cap agreement, ProAssurance paid a
premium of $2 million for the right to receive cash payments based upon a notional amount of $35 million if and when the
three-month LIBOR rises above 235 basis points. The Company's variable-rate Mortgage Loans bear an interest rate of three-
month LIBOR plus 132.5 basis points. Therefore, this derivative instrument is effectively ensuring the interest rate related to
the Mortgage Loans is capped at a maximum of 367.5 basis points until expiration of the interest rate cap agreement in October
2027. ProAssurance has designated the interest rate cap as an economic hedge (non-hedging instrument) of interest rate
exposure and any change in fair value of the derivative is immediately recognized in earnings during the period of change.
The following table provides a summary of the volume and fair value position of the interest rate cap as well as the
reporting location in the Consolidated Balance Sheets as of December 31, 2017 and 2016.
($ in thousands)
December 31, 2017
December 31, 2016
Derivatives Not
Designated as
Hedging Instruments
Location in the
Consolidated
Balance Sheets
Interest Rate Cap Other assets
Number of
Instruments
1
Notional
Amount (1)
Estimated Fair
Value (2)
Number of
Instruments
Notional
Amount (1)
Estimated Fair
Value (2)
$
35,000 $
1,731
—
$
— $
—
(1) Volume is represented by the derivative instrument's notional amount.
(2) Additional information regarding the fair value of the Company's interest rate cap is provided in Note 2.
The following table presents the pre-tax impact of the change in the fair value of the interest rate cap and the reporting
location in the Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2017, 2016
and 2015.
(In thousands)
Year Ended December 31
Gains (Losses) Recognized in Income on Derivatives
Derivatives Not Designated as
Hedging Instruments
Location in the Consolidated
Statements of Income and
Comprehensive Income
2017
2016
2015
Interest Rate Cap
Interest expense
$
(339) $
— $
—
As a result of this derivative instrument, ProAssurance is exposed to risk that the counterparty will fail to meet their
contractual obligations. To mitigate this counterparty credit risk, ProAssurance only enters into derivative contracts with
carefully selected major financial institutions based upon their credit ratings and monitors their creditworthiness. As of
December 31, 2017, the counterparty had an investment grade rating of BBB- and has performed in accordance with their
contractual obligations.
178
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
11. Shareholders’ Equity
At December 31, 2017 and 2016, ProAssurance had 100 million shares of authorized common stock and 50 million
shares of authorized preferred stock. The Board has the authority to determine provisions for the issuance of preferred shares,
including the number of shares to be issued, the designations, powers, preferences and rights, and the qualifications, limitations
or restrictions of such shares. To date, the Board has not approved the issuance of preferred stock.
The following is a summary of changes in common shares issued and outstanding during the years ended December 31,
2017, 2016 and 2015:
Issued and outstanding shares - January 1
(In thousands)
2017
2016
2015
53,251
53,101
56,534
Repurchase of shares, at cost of $2 million and $170 million for 2016
and 2015, respectively
Shares issued due to exercise of options and vesting of share-based
compensation awards
Other shares issued for compensation and shares reissued to stock
purchase plan*
—
132
74
(44)
(3,680)
108
86
150
97
Issued and outstanding shares - December 31
53,457
53,251
53,101
* Shares issued were valued at fair value (the market price of a ProAssurance common share on the date of issue).
As of December 31, 2017, approximately 2.1 million of ProAssurance's authorized common shares were reserved by the
Board for award or issuance under the incentive compensation plans described in Note 12 and an additional 0.6 million of
authorized common shares were reserved for the issuance of currently outstanding restricted share and performance share unit
awards.
ProAssurance declared cash dividends during 2017, 2016 and 2015 as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter*
Cash Dividends Declared, per Share
2017
2016
2015
$
$
$
$
0.31
0.31
0.31
5.00
$
$
$
$
0.31
0.31
0.31
5.00
$
$
$
$
0.31
0.31
0.31
1.31
* Includes special dividends of $4.69 per share in both 2017 and 2016 and $1.00 per share in 2015.
Quarterly dividends were paid in the month following the quarter in which they were declared. Dividends declared during
2017, 2016 and 2015 totaled $316.9 million, $315.0 million and $119.9 million, respectively.
ProAssurance's ability to pay dividends to its shareholders is limited by its holding company structure, to the extent of the
net assets held by its insurance subsidiaries, as discussed in Note 17. Otherwise, there are no other regulatory restrictions on
ProAssurance's retained earnings or net income that materially impact its ability to pay dividends. Based on shareholders' equity
at December 31, 2017, total equity of $239.1 million was free of debt covenant restrictions regarding the payment of dividends.
However, any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review
of financial performance, future expectations and other factors deemed relevant by the Board.
As of December 31, 2017, Board authorizations for the repurchase of common shares or the retirement of outstanding
debt of $109.6 million remained available for use. The timing and quantity of purchases depends upon market conditions and
changes in ProAssurance's capital requirements and is subject to limitations that may be imposed on such purchases by
applicable securities laws and regulations as well as the rules of the NYSE.
Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)
For the years ended December 31, 2017, 2016 and 2015, OCI was primarily comprised of unrealized gains and losses,
including non-credit impairment losses, arising during the period related to available-for-sale securities, less reclassification
adjustments as shown in the table that follows, net of tax. For the year ended December 31, 2016, OCI included $1.0 million of
unrecognized losses reclassified to earnings, net of tax, due to the termination of one of the defined benefit plans assumed in the
Eastern acquisition. The remaining plan is frozen as to the earnings of additional benefits, and the unrecognized plan benefit
179
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
liability is reestimated annually. For the year ended December 31, 2015, OCI included a loss of $1.0 million, net of tax, related
to unrecognized changes from the reestimation of both the defined benefit plan liabilities.
At December 31, 2017 and 2016, AOCI was primarily comprised of unrealized gains and losses from available-for-sale
securities, including accumulated non-credit impairments recognized through OCI of $0.5 million and $0.3 million,
respectively, net of tax. During 2016, as discussed above, one of the defined benefit plans assumed in the Eastern acquisition
was terminated and the related unrecognized losses were reclassified from AOCI to earnings (see following table). At
December 31, 2017 and 2016, unrecognized changes in the remaining defined benefit plan liability were nominal in amount. All
tax effects were computed using a 35% rate, with the exception of unrealized gains and losses on available for sale securities
held at our U.K. and Cayman Island entities which were immaterial in amount.
Amounts reclassified from AOCI to net income and the amounts of deferred tax expense (benefit) included in OCI were
as follows:
(In thousands)
2017
2016
2015
Reclassifications from AOCI to net income:
Realized investment gains (losses)
Non-credit impairment losses reclassified to earnings, due to sale of
securities or reclassification as a credit loss
Unrecognized losses in defined benefit plan liabilities reclassified to
earnings, due to the termination and settlement of the plan
Total gains (losses) reclassified, before-tax effect
Tax effect (at 35%)
Net reclassification adjustments
Deferred tax expense (benefit) included in OCI
$
2,512
$
2,417
$
(4,475)
(3)
—
2,509
(878)
1,631
$
(3,641)
(2,279)
(1,500)
(2,724)
953
(1,771) $
—
(6,754)
2,364
(4,390)
(4,676) $
(3,078) $
(18,370)
$
$
12. Share-Based Payments
Share-based compensation costs are primarily classified as a component of operating expense.
During 2017, 2016 and 2015, ProAssurance provided share-based compensation to employees utilizing three types of
awards: restricted share units, performance share units and purchase match units. The awards were made under either the
ProAssurance Corporation Amended and Restated 2014 Equity Incentive Plan or the ProAssurance Corporation 2008 Equity
Incentive Plan. The Compensation Committee of the Board is responsible for the administration of both plans.
The following table provides a summary of compensation expense and the total related tax benefit recognized during
each period as well as estimated compensation cost that will be charged to expense in future periods, by award type.
Share-Based
Compensation Expense
Year Ended December 31
Unrecognized Compensation Cost
December 31, 2017
($ in millions, except remaining recognition period)
2017
2016
2015
Amount
Restricted Share Units
Performance Share Units
Purchase Match Units
Total share-based compensation expense
Tax benefit recognized
$
$
$
4.5
5.0
1.1
10.6
3.7
$
$
$
3.7
7.6
1.2
12.5
4.4
$
$
$
2.5
5.9
0.8
9.2
3.2
$
$
4.8
3.6
2.1
10.5
Weighted Average
Remaining
Recognition Period
1.7
1.5
2.2
Each award type is charged to expense as an increase to equity over the service period (generally the vesting period)
associated with the award. Restricted share and performance share units vest in their entirety at the end of a three-year period
following the grant date based on a continuous service requirement and, for performance share units, achievement of a
performance objective; partial vesting is permitted for retirees. Purchase match units vest over a three-year period based on a
service requirement with partial vesting permitted for all participants. For the restricted share and purchase match units, a single
share is issued per vested unit. For performance share units, the number of shares issued per vested unit varies based on
180
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
performance goals achieved. For all types of awards, units sufficient to satisfy required tax withholdings are paid in cash rather
than in shares.
Restricted Share Units
Activity for restricted share units during 2017, 2016 and 2015 is summarized below. Grant date fair values are based on
the market value of a ProAssurance common share on the date of grant less the estimated net present value of dividends during
the vesting period.
2017
2016
2015
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
Weighted
Average
Grant Date
Fair Value
44.07
58.35
52.35
43.01
48.63
Units
240,149
$
$
84,565
(4,087) $
(51,107) $
$
269,520
Weighted
Average
Grant Date
Fair Value
43.13
45.59
43.99
44.04
44.07
Units
178,468
109,181
$
$
(5,954) $
(41,546) $
$
240,149
Weighted
Average
Grant Date
Fair Value
42.03
42.79
42.81
39.45
43.13
Units
136,802
$
$
91,943
(1,342) $
(48,935) $
$
178,468
The aggregate grant date fair value of restricted share units vested and released in 2017, 2016 and 2015 totaled $2.2
million, $1.8 million and $1.9 million, respectively. The aggregate intrinsic value of restricted share units vested and released in
2017, 2016 and 2015 (including units paid in cash to cover tax withholdings) totaled $3.1 million, $2.1 million and $2.3
million, respectively.
Performance Share Units
Performance share units vest only if minimum performance objectives are met, and the number of units earned varies
from 50% to 200% of a base award depending upon the degree to which stated performance objectives are achieved.
Performance share unit activity for 2017, 2016 and 2015 is summarized below. The table reflects the base number of units;
actual awards that vest depend upon the extent to which performance objectives are achieved. Grant date fair values are based
on the market value of a ProAssurance common share on the date of grant less the estimated net present value of dividends
during the vesting period.
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
2017
2016
2015
Weighted
Average
Grant Date
Fair Value
43.41
58.35
42.79
42.95
47.11
Base Units
305,240
48,000
$
$
(227) $
(140,908) $
$
212,105
Weighted
Average
Grant Date
Fair Value
44.65
45.59
43.02
44.05
43.41
Base Units
$
390,350
60,000
$
(5,162) $
(139,948) $
$
305,240
Weighted
Average
Grant Date
Fair Value
41.96
42.79
46.05
39.58
44.65
Base Units
466,860
106,490
$
$
(2,322) $
(180,678) $
$
390,350
The aggregate grant date fair value of performance share units (base level) vested and released in 2017, 2016 and 2015
totaled $6.1 million, $6.2 million and $7.2 million, respectively. The aggregate intrinsic value of performance share units (base
level) vested and released in 2017, 2016 and 2015 (including units paid in cash to cover tax withholdings) totaled $8.7 million,
$6.9 million and $8.4 million, respectively. The weighted average level at which the vested units were issued was 119%, 98%
and 115% during 2017, 2016 and 2015, respectively, based on performance levels achieved.
181
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Purchase Match Units
The ProAssurance Corporation 2011 Employee Stock Ownership Plan provides a purchase match unit for each share
purchased with contributions by eligible plan participants, with participant contributions subject to a $5,000 annual limit per
participant. During 2017, the ProAssurance Corporation 2011 Employee Stock Ownership Plan was discontinued and existing
purchase match units will continue to vest according to the vesting period. Purchase match unit activity during 2017, 2016 and
2015 is summarized below. Grant date fair values are based on the market value of a ProAssurance common share on the date
of grant less the estimated net present value of dividends during the vesting period.
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
2017
2016
2015
Weighted
Average
Grant Date
Fair Value
45.77
51.83
48.29
41.33
49.40
Units
$
72,615
$
24,444
(2,012) $
(24,755) $
$
70,292
Weighted
Average
Grant Date
Fair Value
42.80
50.18
43.77
40.88
45.77
Units
$
74,483
$
23,903
(2,875) $
(22,896) $
$
72,615
Weighted
Average
Grant Date
Fair Value
40.62
46.09
41.03
39.79
42.80
Units
$
72,101
$
26,593
(3,087) $
(21,124) $
$
74,483
The aggregate grant date fair value of purchase match units vested and released in 2017, 2016 and 2015 totaled $1.0
million, $0.9 million and $0.8 million, respectively. The aggregate intrinsic value of purchase match share units vested and
released in 2017, 2016 and 2015 (including units paid in cash to cover tax withholdings) totaled $1.4 million, $1.2 million and
$1.0 million, respectively.
Stock Options
ProAssurance also had certain fully-vested employee stock options outstanding during 2016 and 2015, as summarized
below. ProAssurance had no options exercised during 2017 and no outstanding options at December 31, 2017 or 2016.
Outstanding, vested and exercisable,
beginning of year
Exercised
Outstanding, vested and exercisable,
end of year
2017
2016
2015
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Options
Weighted
Average
Exercise
Price
— $
— $
— $
—
—
—
2,114
$
(2,114) $
25.02
25.02
4,456
$
(2,342) $
24.64
24.13
— $
—
2,114
$
25.02
The aggregate intrinsic value of options exercised totaled $0.1 million for each of the years ended December 31, 2016 and
2015. There were no cash proceeds from options exercised during the years ended December 31, 2016 or 2015.
13. Variable Interest Entities
ProAssurance holds passive interests in a number of entities that are considered to be VIEs under GAAP guidance.
ProAssurance's VIE interests principally consist of interests in LPs/LLCs formed for the purpose of achieving diversified equity
and debt returns. ProAssurance's VIE interests, carried as a part of other investments, totaled $33.9 million at December 31,
2017 and $26.9 million at December 31, 2016. ProAssurance's VIE interests, carried as a part of investment in unconsolidated
subsidiaries, totaled $269.0 million at December 31, 2017 and $282.3 million at December 31, 2016.
ProAssurance does not have power over the activities that most significantly impact the economic performance of these
VIEs and thus is not the primary beneficiary. Therefore, ProAssurance has not consolidated these VIEs. ProAssurance’s
involvement with each VIE is limited to its direct ownership interest in the VIE. Except for the funding commitments disclosed
in Note 8, ProAssurance has no arrangements with any of the VIEs to provide other financial support to or on behalf of the VIE.
At December 31, 2017, ProAssurance’s maximum loss exposure relative to these investments was limited to the carrying value
of ProAssurance’s investment in the VIE.
182
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
14. Earnings Per Share
Diluted weighted average shares is calculated as basic weighted average shares plus the effect, calculated using the
treasury stock method, of assuming that restricted share units, performance share units and purchase match units have vested.
The following table provides the weighted average number of common shares outstanding used in the calculation of the
Company's basic and diluted earnings per share for the years ended December 31, 2017, 2016 and 2015:
(In thousands, except per share data)
2017
2016
2015
Year Ended December 31
Weighted average number of common shares
outstanding, basic
Dilutive effect of securities:
Restricted Share Units
Performance Share Units
Purchase Match Units
Weighted average number of common shares
outstanding, diluted
53,393
53,216
54,795
85
110
23
73
135
24
52
145
25
53,611
53,448
55,017
Effect of dilutive shares on earnings per share
$
(0.01) $
(0.01) $
(0.01)
All dilutive common share equivalents are reflected in the earnings per share calculation while antidilutive common share
equivalents are not reflected in the earnings per share calculation. The diluted weighted average number of common shares
outstanding for the year ended December 31, 2017 excludes approximately 7,000 common share equivalents issuable under the
Company's stock compensation plans, as their effect would be antidilutive. There were no common share equivalents that were
antidilutive for the years ended December 31, 2016 and 2015.
183
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
15. Segment Information
ProAssurance operates in four segments that are organized around the nature of the products and services provided:
Specialty P&C, Workers' Compensation, Lloyd's Syndicate and Corporate. A description of each segment follows.
Specialty P&C is primarily focused on professional liability insurance and medical technology liability insurance.
Professional liability insurance is primarily offered to healthcare providers and institutions and to attorneys and their firms.
Medical technology liability insurance is offered to medical technology and life sciences companies that manufacture or
distribute products including entities conducting human clinical trials. The Specialty P&C segment cedes certain premium to
the Lloyd's Syndicate segment under a quota share agreement with Syndicate 1729; however, this agreement was not renewed
on January 1, 2018. As discussed below, the Lloyd's Syndicate segment results are typically reported on a quarter delay. For
consistency purposes, results from this ceding arrangement, other than cash receipts or disbursements, have been reported
within the Specialty P&C segment on the same one-quarter delay.
Workers' Compensation provides workers' compensation products primarily to employers with 1,000 or fewer employees.
The segment also offers alternative market solutions whereby policies written are 100% ceded either to captive insurers
unaffiliated with ProAssurance or to SPCs operated by a wholly owned subsidiary of ProAssurance. Each SPC is owned, fully
or in part, by an agency, group or association. Operating results (underwriting profit or loss, plus investment results reported in
the Corporate segment) of the SPCs are due to the owners of that cell.
Lloyd's Syndicate includes operating results from ProAssurance's 58% participation in Lloyd's of London Syndicate 1729.
Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S.
and international markets. The results of this segment are reported on a quarter delay, except when information is available that
is material to the current period. Furthermore, investment results associated with investment assets solely allocated to Lloyd's
Syndicate operations and certain U.S. paid administrative expenses are reported concurrently as that information is available on
an earlier time frame. Beginning in 2018, the Lloyd's Syndicate segment will include the operating results of a newly formed
SPA, Syndicate 6131, which will focus on contingency and specialty property business. Syndicate 6131 will be reported on the
same quarter delay.
Corporate includes ProAssurance's investment operations, interest expense and U.S. income taxes, all of which are
managed at the corporate level with the exception of investment assets solely allocated to Lloyd's Syndicate operations as
discussed above. The segment also includes non-premium revenues generated outside of our insurance entities and corporate
expenses.
The accounting policies of the segments are the same as those described in Note 1. ProAssurance evaluates performance
of its Specialty P&C and Workers' Compensation segments based on before-tax underwriting profit or loss, which excludes
investment performance. Performance of the Lloyd's Syndicate segment is evaluated based on underwriting profit or loss, plus
investment results of investment assets solely allocated to Lloyd's Syndicate operations, net of U.K. income tax expense.
Performance of the Corporate segment is evaluated based on the contribution made to consolidated after-tax results.
ProAssurance accounts for inter-segment transactions as if the transactions were to third parties at current market prices. Assets
are not allocated to segments because investments and other assets are not managed at the segment level.
184
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
Financial results by segment were as follows:
Specialty
P&C
Workers'
Compensation
Lloyd's
Syndicate
Corporate
Inter-segment
Eliminations
Consolidated
Year Ended December 31, 2017
(In thousands)
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized gains (losses)
Other income (expense)
$ 453,921
—
$
227,408
—
—
—
5,688
—
—
674
Net losses and loss adjustment expenses
(288,701)
(136,237)
$
57,202
$
— $
— $ 738,531
1,736
93,926
—
107
(1,476)
(44,220)
8,033
16,302
2,888
—
—
—
—
(260)
—
95,662
8,033
16,409
7,514
(469,158)
Underwriting, policy acquisition and
operating expenses
Segregated portfolio cells dividend
(expense) income (1)(2)
Interest expense
Income tax benefit (expense) (2)
Segment operating results
Significant non-cash items:
Depreciation and amortization, net of
accretion
(In thousands)
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized gains (losses)
Other income (expense)
(108,830)
(70,945)
(26,963)
(29,275)
260
(235,753)
(4,970)
(5,828)
—
—
—
—
—
—
568
(4,973)
(16,844)
(21,927)
—
—
—
(15,771)
(16,844)
(21,359)
$
57,108
$
15,072
$
(13,046)
$
48,130
$
— $ 107,264
$
7,922
$
3,480
$
(20)
$
17,414
$
— $
28,796
Year Ended December 31, 2016
Specialty
P&C
Workers'
Compensation
Lloyd's
Syndicate
Corporate
Inter-segment
Eliminations
Consolidated
$ 457,816
$
220,815
$
54,650
$
— $
— $ 733,281
—
—
—
5,306
—
—
—
844
1,410
98,602
—
76
1,415
(5,762)
34,799
1,069
—
—
—
—
(826)
—
100,012
(5,762)
34,875
7,808
(443,229)
Net losses and loss adjustment expenses
(268,579)
(140,534)
(34,116)
Underwriting, policy acquisition and
operating expenses
Segregated portfolio cells dividend (expense)
income (1)
Interest expense
Income tax benefit (expense)
Segment operating results
Significant non-cash items:
Depreciation and amortization, net of
accretion
(104,333)
(70,464)
(22,832)
(30,807)
826
(227,610)
(144)
(4,762)
—
—
—
—
—
—
(384)
(3,236)
(15,032)
(24,736)
—
—
—
(8,142)
(15,032)
(25,120)
$
90,066
$
5,899
$
219
$
54,897
$
— $ 151,081
$
7,268
$
5,600
$
132
$
19,789
$
— $
32,789
185
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
(In thousands)
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized gains (losses)
Other income (expense)
Net losses and loss adjustment expenses (3)
Underwriting, policy acquisition and
operating expenses (3)
Segregated portfolio cells dividend (expense)
income (1)
Interest expense
Income tax benefit (expense)
Segment operating results
Significant non-cash items:
Depreciation and amortization, net of
accretion
Year Ended December 31, 2015
Specialty
P&C
Workers'
Compensation
Lloyd's
Syndicate
Corporate
Inter-segment
Eliminations
Consolidated
$ 443,313
$
213,161
$
37,675
$
— $
— $ 694,149
—
—
—
4,561
—
—
—
492
928
—
24
698
(250,168)
(140,744)
(25,181)
107,732
3,682
(41,663)
2,057
—
—
—
—
(581)
5,382
108,660
3,682
(41,639)
7,227
(410,711)
(105,574)
(63,653)
(18,518)
(24,518)
(4,801)
(217,064)
—
—
—
(1,884)
—
—
—
—
(1,240)
1,031
(14,596)
(11,418)
—
—
—
(853)
(14,596)
(12,658)
$
92,132
$
7,372
$
(5,614)
$
22,307
$
— $ 116,197
$
8,663
$
5,696
$
417
$
21,442
$
— $
36,218
(1) During the first quarter of 2017, ProAssurance began reporting in the Corporate segment the portion of the SPC dividend (expense) income
that is attributable to the investment results of the SPCs, all of which are reported in the Corporate segment, to better align the expense with
the related investment results of the SPCs. For comparative purposes, ProAssurance has reflected the SPC dividend expense for 2016 and
2015 in the same manner.
(2) During the second quarter of 2017, ProAssurance recognized a $5.2 million pre-tax expense related to previously unrecognized SPC dividend
expense for the cumulative earnings of unrelated parties that have owned segregated portfolio cells at various periods since 2003 in a Bermuda
captive insurance operation managed by the Company's HCPL line of business within the Specialty P&C segment. The expense recorded
in 2017 related to periods prior to the current period and is unrelated to the captive operations of the Company's Eastern Re subsidiary. The
$1.8 million tax impact of the expense recognized in 2017 is included in the Corporate segment's income tax benefit (expense) for the year
ended December 31, 2017.
(3) In 2015, the portion of the management fee that was allocated to ULAE was eliminated in consolidation. In 2016, ProAssurance discontinued
the practice of eliminating in consolidation the portion of the management fee that was allocated to ULAE, thus there was no similar
elimination in 2016 or 2017.
186
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
The following table provides detailed information regarding ProAssurance's gross premiums earned by product as well as
a reconciliation to net premiums earned. All gross premiums earned are from external customers except as noted.
ProAssurance's insured risks are primarily within the U.S.
(In thousands)
2017
2016
2015
Year Ended December 31
Specialty P&C Segment
Gross premiums earned:
Healthcare professional liability
$
477,561
$
474,981
$
463,599
Legal professional liability
Medical technology liability
Other
Ceded premiums earned
Segment net premiums earned
Workers' Compensation Segment
Gross premiums earned:
Traditional business
Alternative market business
Ceded premiums earned
Segment net premiums earned
Lloyd's Syndicate Segment
Gross premiums earned:
Property and casualty*
Ceded premiums earned
Segment net premiums earned
25,771
33,836
415
(83,662)
453,921
26,125
34,158
667
(78,115)
457,816
28,234
34,838
1,447
(84,805)
443,313
172,603
80,698
(25,893)
227,408
170,492
75,658
(25,335)
220,815
172,115
66,168
(25,122)
213,161
69,749
(12,547)
57,202
60,564
(5,914)
54,650
43,617
(5,942)
37,675
Consolidated net premiums earned
$
738,531
$
733,281
$
694,149
*Includes premium assumed from the Specialty P&C segment of $11.8 million, $14.0 million and $14.4 million for years ended
December 31, 2017, 2016 and 2015, respectively.
16. Benefit Plans
ProAssurance maintains the ProAssurance Savings Plan that is intended to provide retirement income to eligible
employees. ProAssurance provides employer contributions to the plan of up to 10% of salary for qualified employees.
ProAssurance incurred expense related to savings and retirement plans of $7.8 million, $6.9 million and $7.0 million during the
years ended December 31, 2017, 2016 and 2015, respectively.
ProAssurance also maintains the ProAssurance Plan that allows participating management employees to defer a portion
of their current salary. ProAssurance incurred expense related to the ProAssurance Plan of $0.3 million during each of the years
ended December 31, 2017 and 2016 and $0.4 million during the year ended December 31, 2015. ProAssurance deferred
compensation liabilities totaled $20.5 million and $17.2 million at December 31, 2017 and 2016, respectively. The liabilities
included amounts due under the ProAssurance Plan and amounts due under individual agreements with current or former
employees.
187
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
17. Statutory Accounting and Dividend Restrictions
ProAssurance’s domestic U.S. insurance subsidiaries are required to file statutory financial statements with state
insurance regulatory authorities, prepared based upon SAP prescribed or permitted by regulatory authorities. ProAssurance did
not use any prescribed or permitted SAP that differed from the NAIC's SAP at December 31, 2017, 2016 or 2015. Differences
between net income prepared in accordance with GAAP and statutory net income are principally due to: (a) policy acquisition
and certain software and equipment costs which are deferred under GAAP but expensed for statutory purposes and (b) certain
deferred income taxes which are recognized under GAAP but are not recognized for statutory purposes.
The NAIC specifies risk-based capital requirements for property and casualty insurance providers. At December 31,
2017, actual statutory capital and surplus for each of ProAssurance’s insurance subsidiaries substantially exceeded the
regulatory requirements. Net earnings and capital and surplus of ProAssurance’s insurance subsidiaries on a statutory basis are
shown in the following table.
(In millions)
2017
$139
Statutory Net Earnings
Statutory Capital and Surplus
2016
$163
2015
$168
2017
$1,175
2016
$1,403
At December 31, 2017, $1.4 billion of ProAssurance's consolidated net assets were held at its domestic insurance
subsidiaries, of which approximately $137 million are permitted to be paid as dividends over the course of 2018 without prior
approval of state insurance regulators. However, the payment of any dividend requires prior notice to the insurance regulator in
the state of domicile and the regulator may prevent the dividend if, in its judgment, payment of the dividend would have an
adverse effect on the capital and surplus of the insurance subsidiary.
18. Quarterly Results of Operations (unaudited)
The following is a summary of unaudited quarterly results of operations for 2017 and 2016:
(In thousands, except per share data)
Net premiums earned
Net losses and loss adjustment expenses:
Current year
Favorable development of reserves established in
prior years, net
Net income
Basic earnings per share
Diluted earnings per share
(In thousands, except per share data)
Net premiums earned
Net losses and loss adjustment expenses:
Current year
Favorable development of reserves established in
prior years, net
Net income
Basic earnings per share
Diluted earnings per share
1st
182,903
147,927
$
$
(28,776) $
$
41,455
0.78
0.77
1st
177,579
139,660
$
$
$
$
(28,705) $
$
19,317
0.36
0.36
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017*
2nd
180,353
144,562
$
$
(29,012) $
$
19,518
0.37
0.36
$
$
2016*
2nd
176,732
143,668
$
$
(36,769) $
$
43,081
0.81
0.81
$
$
3rd
192,303
161,631
$
$
4th
182,972
149,399
(32,275) $
$
28,949
(44,297)
17,342
0.54
0.54
3rd
185,275
147,093
$
$
$
$
(29,011) $
$
33,834
0.64
0.63
$
$
0.32
0.32
4th
193,694
156,585
(49,292)
54,848
1.03
1.02
*Due to rounding, the sum of quarterly amounts may not equal the total amount for the respective year-to-date periods
188
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017
19. Subsequent Events
In January and February of 2018, ProAssurance repaid $28 million of the balance outstanding on the Revolving Credit
Agreement (see Note 9 for further discussion of the terms of the Revolving Credit Agreement).
189
ProAssurance Corporation and Subsidiaries
Schedule I -- Summary of Investments -- Other than Investments in Related Parties
(In thousands)
Type of Investment
Fixed Maturities
Bonds:
December 31, 2017
Recorded
Cost
Basis
Fair
Value
Amount Which is
Presented
in the
Balance Sheet
U.S. Government or government agencies and authorities
$
155,412
$
154,583
$
States, municipalities and political subdivisions
Foreign governments
Public utilities
All other corporate bonds
Certificates of deposit
Mortgage-backed securities
Total Fixed Maturities
Equity Securities, trading
Common Stocks:
Public utilities
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Total Equity Securities, trading
Other long-term investments, at cost or amortized cost
Other long-term investments, at fair value
Short-term investments
618,414
15,447
82,031
632,243
15,406
83,263
154,583
632,243
15,406
83,263
1,060,032
1,068,339
1,068,339
150
325,702
2,257,188
150
326,258
2,280,242
150
326,258
2,280,242
10,570
67,679
347,693
425,942
58,546
357,982
432,126
12,758
76,051
381,800
470,609
69,095
445,005
432,126
12,758
76,051
381,800
470,609
58,546
445,005
432,126
Total Investments
$
3,531,784
$
3,697,077
$
3,686,528
190
ProAssurance Corporation and Subsidiaries
Schedule II – Condensed Financial Information of Registrant
Condensed Balance Sheet
(In thousands)
Assets
Investment in subsidiaries, at equity
Fixed maturities available for sale, at fair value
Short-term investments
Investment in unconsolidated subsidiaries
Cash and cash equivalents
Due from subsidiaries
Other assets
Total Assets
Liabilities and Shareholders’ Equity
Liabilities:
Dividends payable
Other liabilities
Debt less debt issuance costs
Total Liabilities
Shareholders’ Equity:
Common stock
Other shareholders’ equity, including unrealized gains (losses) on securities of
subsidiaries
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
December 31,
2017
December 31,
2016
$
$
$
$
$
$
$
1,713,656
155,094
268,181
1,200
81,009
2,666
33,829
2,255,635
267,292
22,008
371,540
660,840
1,908,663
267,412
279,510
845
31,330
185
33,350
2,521,295
265,659
8,732
448,202
722,593
628
627
1,594,167
1,594,795
2,255,635
$
1,798,075
1,798,702
2,521,295
191
Table of Contents
ProAssurance Corporation and Subsidiaries
Schedule II – Condensed Financial Information of Registrant
Condensed Statements of Income
(In thousands)
Revenues
Net investment income
Equity in earnings (loss) of unconsolidated subsidiaries
Net realized investment gains (losses)
Other income (loss)
Total revenues
Expenses
Interest expense
Other expenses
Total expenses
Income (loss) before income tax expense (benefit) and equity in net
income of consolidated subsidiaries
Income tax expense (benefit)
Income (loss) before equity in net income of consolidated subsidiaries
Equity in net income of consolidated subsidiaries
Net income
Other comprehensive income
Comprehensive income
Year Ended December 31
2017
2016
2015
$
$
$
7,646
(137)
(8,606)
921
(176)
16,440
26,351
42,791
(42,967)
(13,293)
(29,674)
136,938
107,264
(2,488)
104,776
$
$
6,359
(155)
405
(960)
5,649
15,030
28,305
43,335
(37,686)
(12,583)
(25,103)
176,184
151,081
(6,456)
144,625
$
5,017
—
4,673
378
10,068
14,596
24,695
39,291
(29,223)
(11,657)
(17,566)
133,763
116,197
(34,349)
81,848
192
Table of Contents
ProAssurance Corporation and Subsidiaries
Schedule II – Condensed Financial Information of Registrant
Condensed Statements of Cash Flow
(In thousands)
Year Ended December 31
2017
2016
2015
$
(1,669) $
(10,549) $
(14,411)
—
(1,000)
—
295,035
11,811
169,142
—
1,100
(25,449)
(6,883)
(4,066)
(2,276)
438,414
(77,000)
—
12,030
(315,228)
(6,868)
(387,066)
49,679
31,330
100,240
(262,169)
122,030
(1,983)
(1,100)
—
1,695
(3,090)
(2,805)
(48,182)
100,000
(2,106)
11,384
(118,812)
(3,697)
(13,231)
(71,962)
103,292
81,009
$
31,330
$
200,245
26,074
107,870
—
—
(9,642)
(3,083)
—
(289)
321,175
100,000
(172,772)
6,063
(217,626)
(6,337)
(290,672)
16,092
87,200
103,292
17,193
15,892
$
$
(8,519) $
$
14,732
47,004
13,996
267,292
$
190,709
$
— $
265,659
174,270
$
$
— $
69,447
206,880
87,719
Net cash provided (used) by operating activities
Investing activities
(Investments in) distributions from unconsolidated subsidiaries, net:
Other partnership investments
Proceeds from sales or maturities of:
Fixed maturities, available for sale
Net decrease (increase) in short-term investments
Dividends from subsidiaries
Contribution of capital to subsidiaries
Unsettled security transactions, net of change
Funds (advanced) repaid for Lloyd's FAL deposit
Funds (advanced) repaid under Syndicate Credit Agreement
Funds (advanced) repaid under a business investment line of credit
Other
Net cash provided (used) by investing activities
Financing activities
Borrowings (repayments) under Revolving Credit Agreement
Repurchase of common stock
Subsidiary payments for common shares and share-based
compensation awarded to subsidiary employees
Dividends to shareholders
Other
Net cash provided (used) by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes, net of refunds
Cash paid during the year for interest
Significant non-cash transactions:
Dividends declared and not yet paid
Securities transferred at fair value as dividends from subsidiaries
Non-cash capital contribution to subsidiaries
$
$
$
$
$
$
193
Table of Contents
Basis of Presentation
ProAssurance Corporation and Subsidiaries
Schedule II – Condensed Financial Information of Registrant
Note to Condensed Financial Statements of Registrant
The registrant-only financial statements should be read in conjunction with ProAssurance Corporation’s Consolidated
Financial Statements and Notes thereto.
At December 31, 2017 and 2016, PRA investment in subsidiaries is stated at the initial consolidation value plus equity in
the undistributed earnings of subsidiaries since the date of acquisition.
ProAssurance Corporation has a management agreement with several of its insurance subsidiaries whereby ProAssurance
Corporation charges the subsidiaries a management fee for various management services provided to the subsidiary. Under the
arrangement, the expenses associated with such services remain as expenses of ProAssurance Corporation and the management
fee charged is reported as an offset to ProAssurance Corporation expenses. Prior to 2015, a substantial portion of expenses
associated with services provided to insurance subsidiaries were directly allocated or directly charged to the insurance
subsidiaries.
Reclassifications
Certain insignificant prior year amounts have been reclassified to conform to the current year presentation.
194
ProAssurance Corporation and Subsidiaries
Schedule III – Supplementary Insurance Information
(In thousands)
2017
2016
2015
Net premiums earned
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Consolidated
Net investment income (1)
Lloyd's Syndicate
Corporate
Consolidated
Losses and loss adjustment expenses incurred related to current year,
net of reinsurance
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Inter-segment eliminations
Consolidated
Losses and loss adjustment expenses incurred related to prior year, net
of reinsurance
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Consolidated
Paid losses and loss adjustment expenses, net of reinsurance
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Inter-segment eliminations
Consolidated
Amortization of DPAC
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Inter-segment eliminations
Consolidated
Other underwriting, policy acquisition and operating expenses
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Corporate
Inter-segment eliminations
Consolidated
Net premiums written
Specialty P&C
Workers' Compensation
Lloyd's Syndicate
Consolidated
Deferred policy acquisition costs (1)
Reserve for losses and loss adjustment expenses (1)
Unearned premiums (1)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
453,921 $
227,408
57,202
738,531 $
1,736 $
93,926
95,662 $
407,994 $
150,492
45,032
—
603,518 $
(119,293) $
(14,255)
(812)
(134,360) $
324,347 $
122,042
29,926
—
476,315 $
48,469 $
32,088
15,194
—
95,751 $
60,361 $
38,857
11,769
29,275
(260)
140,002 $
470,535 $
238,514
54,969
764,018 $
457,816 $
220,815
54,650
733,281 $
1,410 $
98,602
100,012 $
405,738 $
146,654
34,615
—
587,007 $
(137,159) $
(6,120)
(499)
(143,778) $
343,678 $
114,320
21,254
—
479,252 $
45,019 $
29,590
13,769
—
88,378 $
59,314 $
40,874
9,063
30,807
(826)
139,232 $
458,681 $
223,578
56,274
738,533 $
443,313
213,161
37,675
694,149
928
107,732
108,660
409,149
142,943
25,181
(5,382)
571,891
(158,981)
(2,199)
—
(161,180)
346,606
126,296
7,549
(5,416)
475,035
45,459
26,232
7,841
24
79,556
60,115
37,421
10,677
24,518
4,777
137,508
442,126
218,338
48,821
709,285
50,261 $
2,048,381 $
398,884 $
46,809 $
1,993,428 $
372,563 $
44,388
2,005,326
362,066
(1) Assets are not allocated to segments because investments and assets are not managed at the segment level.
195
ProAssurance Corporation and Subsidiaries
Schedule IV - Reinsurance
($ in thousands)
Property and Liability *
Premiums earned
Premiums ceded
Premiums assumed
Net premiums earned
Percentage of amount assumed to net
2017
2016
2015
$
$
821,249 $
(110,347)
27,629
738,531 $
3.74%
790,791 $
(95,315)
37,805
733,281 $
5.16%
772,968
(101,510)
22,691
694,149
3.27%
* All of ProAssurance’s premiums are related to property and liability coverages.
196
Exhibit
Number
2
2.1
2.2
EXHIBIT INDEX
Description
Schedules to the following documents are omitted; the contents of the schedules are generally described
in the documents; and ProAssurance will upon request furnish to the Commission supplementally a copy
of any omitted schedule
Stock Purchase Agreement dated as of June 26, 2012, by and among ProAssurance Corporation, PRA
Professional Liability Group, Inc. and Medmarc Mutual Insurance Company, filed as an Exhibit to
ProAssurance's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 (File No.
001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
Agreement and Plan of Merger by and among ProAssurance Corporation, PA Merger Company and
Eastern Insurance Holdings, Inc., dated September 23, 2013, filed as an Exhibit to ProAssurance's
Current Report on Form 8-K for event occurring September 24, 2013 (File No. 001-16533) and
incorporated herein by reference pursuant to SEC Rule 12b-32.
3.1(a)
Certificate of Incorporation of ProAssurance, filed as an Exhibit to ProAssurance’s Registration
Statement on Form S-4 (File No. 333-49378) and incorporated herein by reference pursuant to SEC Rule
12b-32.
3.1(b)
Certificate of Amendment to Certificate of Incorporation of ProAssurance, filed as an Exhibit to
ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2001 (File
No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
3.2
4.1
4.2
Fourth Restatement of the Bylaws of ProAssurance, effective December 2, 2015, filed as an Exhibit to
ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2015 (File
No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
Indenture, dated November 21, 2013, between ProAssurance and Wilmington Trust Company, filed as an
Exhibit to ProAssurance's Current Report on Form 8-K for event occurring November 21, 2013 (File No.
001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
First Supplemental Indenture, dated November 21, 2013, between ProAssurance and Wilmington Trust
Company relating to the $250,000 5.30% Senior Notes due 2023, filed as an Exhibit to ProAssurance's
Current Report on Form 8-K for event occurring November 21, 2013 (File No. 001-16533) and
incorporated herein by reference pursuant to SEC Rule 12b-32.
ProAssurance will file with the Commission upon request pursuant to the requirements of Item 601 (b)
(4) of Regulation S-K documents defining rights of holders of ProAssurance’s long-term indebtedness
that has not been registered. See also the documents related to long-term indebtedness filed as material
contracts under Exhibits 10.10(a), (b), (c), (d), (e) and (f) to this Form 10-K.
10.1
Form of Release and Severance Compensation Agreement dated as of January 1, 2008 between
ProAssurance and each of the following named executive officers:*
Howard H. Friedman Jeffrey P. Lisenby
Frank B. O’Neil Edward L. Rand Jr.
Filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended December 31,
2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.
10.2
Employment Agreement between ProAssurance and W. Stancil Starnes dated as of May 1, 2007, filed as
an Exhibit to ProAssurance’s Current Report on Form 8-K for the event occurring May 12, 2007 (File
No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*
10.2(a)
Amendment to Employment Agreement with W. Stancil Starnes (May 1, 2007), effective as of January
1, 2008, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC
Rule 12b-32.*
10.2(b)
10.2(c)
Amendment to Employment Agreement with W. Stancil Starnes (May 1, 2007), effective as of June 1,
2015, filed as an Exhibit to ProAssurance's Current Report on Form 8-K dated May 27, 2015 (File No.
001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.*
Amendment to Employment Agreement with W. Stancil Starnes (May 1, 2007), effective as of June 1,
2017, filed as an Exhibit to ProAssurance's Current Report on Form 8-K dated May 31, 2017 (File No.
001-16533) and incorporated herein by this reference pursuant to SEC Rule 12b-32.*
197
10.3
Form of Release and Severance Compensation Agreement dated as of September 1, 2011 between
ProAssurance and Ross E. Taubman, filed as an Exhibit to ProAssurance’s Definitive Proxy Statement
(File No. 001-16533) on April 11, 2008 and incorporated herein by reference pursuant to SEC Rule
12b-32.*
10.4
Form of Indemnification Agreement between ProAssurance and each of the following named executive
officers and directors of ProAssurance*:
Bruce D. Angiolillo Samuel A. Di Piazza, Jr.
Robert E. Flowers Howard H. Friedman
M. James Gorrie Ziad R. Haydar
Jeffrey P. Lisenby John J. McMahon
Frank B. O’Neil Katisha T. Vance
Edward L. Rand, Jr. Frank A. Spinosa
W. Stancil Starnes Ross E. Taubman
Michael L. Boguski Thomas A. S. Wilson, Jr.
Filed as an Exhibit to ProAssurance’s Definitive Proxy Statement (File No. 001-16533) on April 11,
2008 and incorporated herein by reference pursuant to SEC Rule 12b-32.
10.5
ProAssurance Group Employee Benefit Plan which includes the Executive Supplemental Life Insurance
Program (Article VIII), filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 001-16533) and incorporated herein by reference pursuant to SEC
Rule 12b-32.*
10.6
Amendment and Restatement of the Executive Non-Qualified Excess Plan and Trust effective January 1,
2008, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC
Rule 12b-32.*
10.7
Director Deferred Compensation Plan as amended and restated December 7, 2011, filed as an Exhibit to
ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2011 (File No.
001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*
10.7(a)
10.8
10.8(a)
10.8(b)
10.8(c)
10.8(d)
Amendment No. 1 to the Amended and Restated Director Deferred Compensation Plan dated May 22,
2013, filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ended June
30, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*
Revolving Credit Agreement, dated April 15, 2011, between ProAssurance and U.S. Bank National
Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First
Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2011 (File No. 001-16533) and incorporated herein
by reference pursuant to SEC Rule 12b-32.
Amendment No. 1 to Revolving Credit Agreement between ProAssurance and U.S. Bank National
Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First
Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2012 (File No. 001-16533) and incorporated
herein by reference pursuant to SEC Rule 12b-32.
Amendment No. 2 to Revolving Credit Agreement between ProAssurance and U.S. Bank National
Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First
Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance's Current
Report on Form 8-K for event occurring November 8, 2013 (File No. 001-16533) and incorporated
herein by reference pursuant to SEC Rule 12b-32.
Form of the Augmenting Lender Supplement to Revolving Credit Agreement between ProAssurance and
U.S. Bank National Association, Wells Fargo Bank, National Association, Branch Banking and Trust
Company, First Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to
ProAssurance's Quarterly Report on Form 10-Q for the quarter ending June 30, 2014 (File No.
001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
Copy of the Augmenting Lender Supplement to Revolving Credit Agreement between ProAssurance and
U.S. Bank N.A., Wells Fargo Bank, N.A., Branch Banking and Trust Company, First Tennessee Bank,
N.A., Key Bank, Cadence Bank, N.A., and Regions Bank, N.A., dated June 19, 2015, filed as an Exhibit
to ProAssurance’s Annual Report on Form 10-K for the year ended December 31, 2015 (File
No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
198
10.8(e)
10.9
10.10
10.11
10.12
10.13
Amendment No. 5 to Revolving Credit Agreement between ProAssurance and U.S. Bank National
Association, Wells Fargo Bank, National Association, Branch Banking and Trust Company, First
Tennessee Bank, N.A., and JP Morgan Chase Bank N.A., filed as an Exhibit to ProAssurance's to
ProAssurance’s Annual Report on Form 10-K for the Year ended December 31, 2017 (File
No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
Pledge and Security Agreement between ProAssurance and U.S. Bank National Association, filed as an
Exhibit to ProAssurance’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (File
No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
ProAssurance Corporation Amended and Restated 2014 Equity Incentive Plan, filed as an Exhibit to
ProAssurance’s Current Report on Form 8-K for event occurring May 14, 2013 (File No. 001-16533)
and incorporated herein by reference pursuant to SEC Rule 12b-32.*
ProAssurance Corporation 2014 Annual Incentive Plan, filed as an Exhibit to ProAssurance’s Definitive
Proxy Statement (File No. 001-16533) filed on May 22, 2013 and incorporated herein by reference
pursuant to SEC Rule 12b-32.*
Retention and Severance Compensation Agreement effective January 1, 2013, between ProAssurance
and Mary Todd Peterson, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year
ended December 31, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC
Rule 12b-32.*
Facility Agreement between ProAssurance and the Premiums Trust Fund of Syndicate 1729, filed as an
Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2013 (File No.
001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.
10.13(a)
Amendment to Facility Agreement effective April 6, 2016, between ProAssurance and the Premiums
Trust Fund of Syndicate 1729 filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2016 (File No. 001-16533) and incorporated herein by reference pursuant to
SEC Rule 12b-32.
10.14
10.15
10.16
10.17
21.1
23.1
31.1
31.2
32.1
32.2
Retention and Severance Compensation Agreement effective January 1, 2014, between ProAssurance
and Michael L. Boguski, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year
ended December 31, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC
Rule 12b-32.*
Mortgage Agreement, dated December 11, 2017, between ProAssurance Indemnity Company, Inc. and
First Tennessee Bank National Association, filed as an Exhibit to ProAssurance’s Annual Report on
Form 10-K for the year ended December 31, 2017 (File No. 001-16533) and incorporated herein by
reference pursuant to SEC Rule 12b-32.
Mortgage Agreement, dated December 11, 2017, between Podiatry Insurance Company of America and
First Tennessee Bank National Association, filed as an Exhibit to ProAssurance’s Annual Report on
Form 10-K for the Year ended December 31, 2017 (File No. 001-16533) and incorporated herein by
reference pursuant to SEC Rule 12b-32.
Interest Rate Cap Agreement, dated October 23, 2017, between Podiatry Insurance Company of America
and First Tennessee Bank National Association, filed as an Exhibit to ProAssurance’s Annual Report on
Form 10-K for the Year ended December 31, 2017 (File No. 001-16533) and incorporated herein by
reference pursuant to SEC Rule 12b-32.
Subsidiaries of ProAssurance Corporation
Consent of Ernst & Young LLP
Certification of Principal Executive Officer of ProAssurance as required under SEC Rule 13a-14(a)
Certification of Principal Financial Officer of ProAssurance as required under SEC Rule 13a-14(a)
Certification of Principal Executive Officer of ProAssurance as required under SEC Rule 13a-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350)
Certification of Principal Financial Officer of ProAssurance as required under SEC Rule 13a-14(b) and
18 U.S.C. 1350
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
199
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
* Denotes a management contract or compensatory plan, contract or arrangement required to be filed as an Exhibit to this report.
XBRL Taxonomy Extension Presentation Linkbase Document
200
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Appendix A
Non-GAAP Financial Measures
Non-GAAP operating income is a financial measure that is widely used to evaluate performance within the
insurance sector. In calculating Non-GAAP operating income, we have excluded the after-tax effects of the items
listed in the following table that do not reflect normal operating results. We believe Non-GAAP operating income
presents a useful view of the performance of our insurance operations, however it should be considered in
conjunction with net income computed in accordance with GAAP.
Reconciliation of Net income to Non-GAAP operating income:
Year Ended December 31,
(in thousands, except per share amounts)
Net income
Items excluded in the calculation of Non-GAAP
operating income:
2017
2015
$ 107,264 $ 151,081 $ 116,197 $ 196,565 $ 297,523
2014
2016
2013
Net realized investment (gains) losses
(16,409)
(34,875)
41,639
(14,654)
(67,904)
Net realized gains (losses) attributable to
SPCs which no profit/loss is retained (1)
Guaranty fund assessments (recoupments)
Gain on acquisition
Effect of confidential settlements, net
Pre-tax effect of exclusions
Tax effect, at 35%
After-tax effect of exclusions
Non-GAAP operating income, before tax
reform adjustments
Tax reform adjustments on our deferred tax
balances excluded in the calculation of Non-
GAAP operating income:
Adjustment of deferred taxes upon
the change in corporate tax rate (2)
Adjustment of deferred taxes upon the
change in limitation of future deductibility
of certain executive compensation (2)
Non-GAAP operating income
Per diluted common share:
Net income
Effect of exclusions
Non-GAAP operating income per diluted common
share
3,083
2,049
(1,192)
377
—
(157)
—
—
153
—
—
218
—
—
(169)
40
— (32,314)
(866)
—
(13,483)
(32,673)
40,665
(15,312)
(100,178)
4,719
11,436
(14,233)
5,359
23,752
(8,764)
(21,237)
26,432
(9,953)
(76,426)
98,500
129,844
142,629
186,612
221,097
6,541
—
—
—
—
3,497
—
$ 108,538 $ 129,844 $ 142,629 $ 186,612 $ 221,097
—
—
—
$
$
2.00 $
0.02
2.83 $
2.11 $
3.30 $
(0.40)
0.48
(0.17)
4.80
(1.24)
2.02 $
2.43 $
2.59 $
3.13 $
3.56
(1) Net realized investment gains (losses) on investments held by our Cayman Islands reinsurance subsidiary, Eastern Re, are
recognized in the earnings of our Corporate segment and the portion of earnings related to the gain or loss, net of our
participation, is distributed back to the cells through our SPC dividend expense (income). To be consistent with our
exclusion of net realized investment gains (losses) recognized in earnings, we are excluding the portion of net realized
investment gains (losses) that is included in SPC dividend expense (income).
(2) Due to tax reform enacted by the TCJA, we remeasured our deferred tax assets and liabilities based on the newly enacted
tax rate of 21% and recognized a charge of $6.5 million, which is included as a component of income tax expense from
continuing operations for the year ended December 31, 2017. In addition, we have made a reasonable estimate of the
effects on our deferred tax asset balances at December 31, 2017 as it relates to the limitation on the future deductibility on
certain executive compensation and recorded a provisional charge to income tax expense of $3.5 million for the year
ended December 31, 2017. Any future guidance from the IRS addressing the effects of the TCJA on executive
compensation could result in a change to this provisional amount.
This page is not a part of ProAssurance’s Annual Report on Form 10K, and was not filed with the Securities &
Exchange Commission.
Appendix A
INVESTOR INFORMATIONThere were 53,593,043 shares of ProAssurance Corporation common stock outstanding at March 15, 2018. On that date, we had 2,667 shareholders of record. Our common stock trades on The New York Stock Exchange under the symbol PRA. The price of our stock is available from any website that provides stock quotes. We also post the price of our stock on our website, www.ProAssurance.com.YOUR SHARESIf you hold your shares through a brokerage account, your broker or a customer service representative at that firm should be able to answer questions about your holdings.If you hold your shares in certificate form, or have shares held in direct registration (DRS), you are a “registered holder.” Registered holders may contact our transfer agent, Computershare, for address changes, transfer of certificates, and replacement of share certificates that have been lost or stolen. You may reach Computershare in a variety of ways: DIRECT DEPOSIT OF DIVIDENDS FOR REGISTERED HOLDERS We encourage registered holders to have dividends deposited directly into a designated account to ensure prompt, secure delivery of your funds. You may arrange for Direct Deposit by updating your banking details with Computershare (www-us.computershare.com/Investor/myProfile) once you have established online access to your account with Computershare.CORPORATE GOVERNANCE AND COMPLIANCE WITH REGULATORY AND NEW YORK STOCK EXCHANGE REQUIREMENTSWe invite you to visit the Investor Relations and Corporate Governance sections of our website, http://investor.proassurance.com. There you will find important information about our Company, including our Corporate Governance Principles and Code of Ethics and Conduct, which were developed and adopted by our Board of Directors. The Governance section of our website (http://investor.proassurance.com/govdocs) also pro-vides copies of the Board-adopted charters for our Audit, Compensation, and Nominating/Corporate Governance Committees and our Internal Audit Charter. Our Corporate Governance section also provides information such as stock ownership guidelines, committee composition and lead-ership, and director independence, including categorical standards to assist in determining independence.Our filings with the Securities and Exchange Commission (SEC) are available in the Investor Relations section of our website (http://investor.proassurance.com/Docs). Our SEC filings are also available in the EDGAR section of the SEC’s website (www.sec.gov/edgar.shtml).W. Stancil Starnes, our Chief Executive Officer, submitted the required Section 12(a) CEO Certification to the New York Stock Exchange on June 6, 2017. Additionally, we have been timely in the filing of CEO/CFO certifications as required in Section 302 of the Sarbanes-Oxley Act. These certifications are published as exhibits in our Form 10-K filed with the SEC on February 21, 2018.INVESTOR RELATIONSThe Investor Relations section of our website (http://inves-tor.proassurance.com) also contains detailed financial information, a dividend payment history, SEC filings, the latest news releases about the Company and our latest presentation materials. We also maintain an archive of presentation materials, although you should realize that archived information, by its very nature, may no longer be accurate.OBTAINING INFORMATION DIRECTLY FROM PROASSURANCEAny of the documents mentioned above may be obtained from our Communications and Investor Relations Department using one of the contact methods below:BY EMAIL:Investor@ProAssurance.comBY U. S. POSTAL SERVICE: ProAssurance CorporationInvestor RelationsP. O. Box 590009Birmingham, AL 35259-0009BY PHONE OR FAX:Phone: (205) 877-4400 • (800) 282-6242Fax: (205) 802-4799ANNUAL MEETINGThe 2018 Annual Meeting is scheduled for 9:00 AM CDT on Wednesday, May 23, 2018 at the headquarters of ProAssurance Corporation, 100 Brookwood Place, Birmingham, Alabama 35209.By Mail ComputershareP. O. Box 30170 College Station, TX 77842By InternetInformation about your account including share transfer, direct deposit of dividends and your dividend payment history www-us.computershare.com/Investor. Immediate access to tax forms www-us.computershare.com/investor/QuickTax For technical assistance with the Computershare website, please phone (800) 942-5909.211 Quality Circle, Suite 210College Station, TX 77845By Phone(800) 851-4218 or (201) 680-6578Income Statement HighlightsGross premiums writtenNet premiums earnedTotal revenues Net losses and loss adjustment expenses Net income (2)Operating income (3)Balance Sheet HighlightsTotal investments Total assets (4)Reserve for losses and loss adjustment expensesDebt(4) Total liabilities (4)(1) Includes acquired entities since date of acquisition only.(2) Includes a gain on acquisition of $32.3 million for the year ended December 31, 2013. (3) A reconciliation of Net income to Non-GAAP operating income is provided in Appendix A to the ProAssurance Form 10K included with this mailing to shareholders.(4) For all periods presented, Debt is shown net of unamortized Debt issuance costs which were previously reported as a part of Other assets. 2014$ 779,609 $ 669,731$ 852,326$ 363,084 $ 196,565$ 186,612 $4,009,707 $5,167,375$2,058,266$ 248,215 $3,009,431 2015$ 812,218 $ 694,149 $ 772,079 $ 410,711 $ 116,197 $ 142,629 $3,650,130 $4,906,021$2,005,326 $ 347,858 $2,947,667 2016 $ 835,014 $ 733,281$ 870,214$ 443,229 $ 151,081 $ 129,844 $3,925,696 $5,065,181$1,993,428$ 448,202 $3,266,479 2017 $ 874,876 $ 738,531$ 866,149$ 469,158 $ 107,264 $ 108,538 $3,686,528 $4,929,197 $2,048,381 $ 411,811 $3,334,402 2013$ 567,547 $ 527,919 $ 740,178$ 224,761$ 297,523$ 221,097 $3,941,045 $5,147,794$2,072,822$ 247,695 $2,753,380FISCAL YEARS ENDED DECEMBER 31Financial Highlights(1)®(in thousands) PROASSURANCE 2017 ANNUAL REPORT Our Policy: Value2017 annual report® ® 100 Brookwood PlaceBirmingham, Alabama 35209205-877-4400 • 800-282-6242www.ProAssurance.com® PROASSURANCE 2017 ANNUAL REPORT 100 Brookwood PlaceBirmingham, Alabama 35209205-877-4400 • 800-282-6242www.ProAssurance.com®