STRENGTH FROM OUR PAST
CONFIDENCE IN OUR FUTURE
2018 ANNUAL REPORT
FINANCIAL
HIGHLIGHTS
(Dollars in thousands)
INCOME STATEMENT HIGHLIGHTS
Gross premiums written
Net premiums earned
Total revenues
Net losses and loss adjustment expenses
Net income
Operating income (1)
BALANCE SHEET HIGHLIGHTS
Total investments
Total assets (2)
Reserve for losses and loss adjustment expenses
Debt (2)
Total liabilities (2)
FISCAL YEARS ENDED DECEMBER 31
2018
2017
2016
2015
2014
$
$
$
$
$
$
957,311
818,853
886,030
593,210
47,057
79,527
$
$
$
$
$
$
874,876
738,531
866,149
469,158
107,264
108,538
$
$
$
$
$
$
835,014
733,281
870,214
443,229
151,081
129,844
$
$
$
$
$
$
812,218
694,149
772,079
410,711
116,197
142,629
$
$
$
$
$
$
779,609
699,731
852,326
363,084
196,565
186,612
$ 3,349,382
$ 3,686,528
$ 3,925,696
$ 3,650,130
$ 4,009,707
$ 4,600,726
$ 4,929,197
$ 5,065,181
$ 4,906,021
$ 5,167,375
$
$
$
2,119,847
$ 2,048,381
$ 1,993,428
$ 2,005,326
$ 2,058,266
287,757
$
411,811
$
448,202
$
347,858
$
248,215
3,077,724
$ 3,334,402
$ 3,266,479
$ 2,947,667
$ 3,009,431
(1) A reconciliation of Net Income to Non-GAAP Operating Income is provided in Appendix A to the ProAssurance Form 10-K included with this
mailing to shareholders.
(2) For all periods presented, Debt is shown net of unamortized debt issuance costs, which were previously reported as a part of other assets.
STRENGTH FROM OUR PAST
CONFIDENCE IN OUR FUTURE
TO OUR FELLOW SHAREHOLDERS,
Some shareholder letters almost
write themselves; this is not one of
those letters. We face the paradox of
communicating the challenging market
conditions in which we operate while at
the same time explaining why we have
such confidence in ProAssurance and
the carefully developed strategy we
believe will propel us to new success.
We have been here before.
Despite what many pundits would
have you believe, there will always be
cyclicality in insurance. Each will be
different in length, some soft markets
will be more damaging than others,
and some will harden more quickly or
more slowly. The one constant is that
ProAssurance will always navigate the
cycles from strength because we know
that as a specialty insurance company
selling long-tailed coverage, there is no
substitute for a strategy that emphasizes
long-term success over short-term
expediency. Our policyholders expect it,
and our shareholders ultimately benefit.
SPECIALTY P&C
Our Specialty P&C segment grew gross
premiums written to $577 million in 2018,
despite intense competition in every
operating line. Healthcare professional
liability (HCPL) is the largest component
of our Specialty P&C segment and it is
among the most competitive lines of
business in which we write. The current
soft market in HCPL is the longest we
have ever seen, but all signs point to
a gradual hardening of that market as
industry-wide loss trends appear to
be worsening and pricing is firming.
At the same time, the evolution of the
American healthcare system is forming
the other side of a vise that should
slowly squeeze reason and rationality
back into this line of business — and
ProAssurance is well positioned to
respond to these changing dynamics.
Capital levels in the HCPL industry
have been inflated by the dramatic and
unexpected downturn in claim frequency
that occurred in the middle of the last
decade. Billions of dollars accumulated
in anticipation of a continuing escalation
of claim costs have served to fuel what
we see as artificially low pricing as
competitors have used their capital to
win and retain business. We have not
yielded to that temptation and, as a
result, we have maintained the balance
sheet strength that will allow us to keep
the promise of insurance protection we
make to insureds, and has allowed us to
responsibly return more than $2 billion to
shareholders since 2007.
ProAssurance is winning and retaining
business by demonstrating the value of
our HCPL coverage to policyholders, as
evidenced by the premium retention we
achieved in 2018: 90% in our physician
business and 87% in the very competitive
hospital and facility line. And we achieved
that retention despite implementing
necessary price increases averaging
3% for physicians and 7% for hospitals
and facilities. We are not only retaining
existing business but also adding record
amounts of new business: almost
$40 million in 2018, split evenly between
physicians and hospitals and facilities.
Our success in the hospital and facility
line is due to our growing importance and
acceptance in the broker market, a key
goal for the past five years.
Our Medmarc subsidiary, which
writes medical technology and life
science liability policies, faces equally
competitive conditions as larger,
multi-line insurers remain active in this
market. In the face of such competition,
Medmarc added $14 million to the
operating results of our Specialty P&C
segment for the year.
Despite these positive signs and all they
portend for the future, the Specialty P&C
segment was less profitable in 2018 than
in 2017. There are a number of factors
at work here and it is important that you
understand them.
As we have said, specializing in long-tail
lines of insurance requires that we adopt
a strategy that ensures our long-term
success. Thus, as we have begun to see
loss trends in the broader healthcare
professional liability industry deteriorate,
we have adopted a position of greater
caution with regard to establishing
reserves to guard against the ripple-
back effects should those loss trends
emerge in our book of business. To
date, that has not happened, but as the
1
ANNUAL REPORT 2018 1000000
880000
760000
640000
520000
400000
GROSS PREMIUMS WRITTEN
($ in thousands)
$957,311
$874,876
$812,218
$835,014
$779,609
$553,922
$533,205
$565,895
$567,547
$536,431
$471,482
’08
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
industry sees record levels of verdicts
above $25 million—17 in 2018 alone—we
must assume that we are not immune
and act to ensure the security of our
balance sheet. That has meant higher
accident year loss picks and lower, yet
still favorable, loss reserve development.
We expect to continue our conservative
stance for the foreseeable future, but we
do not view that as a bar to profitability
in this segment. Just the opposite – we
believe that we will be better positioned
than most to respond to the hardening of
the market that will result.
As we look ahead, we are confident that
the changing landscape of American
healthcare will favor well capitalized,
geographically diverse writers such as
ProAssurance. We have the unparalleled
expertise needed to successfully
provide coverage across the spectrum
of healthcare. No risk is too small or too
large, and no organization is too complex
or too limited in scope. We have prepared
ProAssurance to succeed and grow,
whether that is through organic growth or
through continued M&A.
At the same time, we can successfully
serve our markets with our current
capabilities and geographic reach.
We will grow only into those markets
where we can find attractive risks and
a legal environment that is conducive
to fair treatment of all parties. Should
we elect to pursue a responsible
M&A transaction, it would be one that
advances us into needed geographies
or adds additional specialty-specific
capabilities, but it is not essential to
our success. We will remain judicious in
our growth and will deploy our capital
where it best serves the interest of our
shareholders and the Company.
WORKERS’ COMPENSATION INSURANCE
Eastern Alliance Insurance Group,
our workers’ compensation insurance
operating unit, had a stellar year in 2018,
growing gross premiums to $293 million,
increasing the segment’s operating
results to $14 million, and improving the
combined ratio for the segment by more
than a point, to 93.6%.
This success was achieved despite
heavy competitive pressures from
multi-line competitors, regional
workers’ compensation specialists and
small business technology players.
Eastern’s operational consistency and
commitment to its well established
business model delivered considerable
value to its agency partners and
customer base during 2018. The ability
to differentiate through high quality and
energetic people, innovative products
and excellent service delivery led to
strong production results across all
operating regions. The production
results included premium retention
of 86%, new business writings of
$51.5 million and limiting renewal rate
decreases to less than 1.0%. All of these
production metrics were improvements
compared to 2017, and include the
business ceded to the Segregated
Portfolio Cell Reinsurance segment.
Eastern continues to benefit from the
success of two strategic initiatives
launched in 2017. The Great Falls renewal
rights transaction, which now represents
Eastern’s New England region, produced
$15.0 million of profitable premium
writings in 2018. Overall, this transaction
provides us with further geographic
diversification, a profitable New England
operating platform and the ability to
deliver our unite® small business brand
into this territory.
The second strategic initiative, Eastern
Specialty Risk, which writes a slightly
2
60
50
40
30
20
10
0
GROWTH IN BOOK VALUE PER SHARE & DIVIDENDS(1)
(to December 31, 2018)
$52.52
$47.41
$43.56
■ Book Value + Dividends
■ Book Value
$35.67
$36.85
$38.17
$26.30
$19.35
$33.78
$28.39
$3.14
$4.28
$5.79
$1.84
$6.96
$8.01
$12.30
$9.39
’91
’92
’93
’94
’95
’96
’97
’98
’99
’00
’01
’02
’03
’04
’05
’06
’07
’08
’09
’10
’11
’12
’13
’14
’15
’16
’17
’18
(1) Book value has declined as we have returned capital to shareholders through dividends.
higher hazard class of business, wrote
$8.2 million of profitable business in
2018, a $3.0 million increase over the
2017 launch year writings of $5.2 million.
The Company continues to build a high
quality book of business in this market
segment. Agency partners value our
underwriting expertise, risk management
capabilities and proven service model.
Accident year severity loss trends
increased in 2018, driven by economic
expansion and claim activity from
inexperienced workers as employers
hired rapidly. These trends are being
addressed through a combination of
underwriting and risk management
strategies specific to the inexperienced
workers trend. The 2018 accident year
severity trends were more than offset
by an exceptional claim-closing year
resulting in $8.0 million of favorable
loss reserve development primarily from
accident years 2015 and 2016. The
claims operation closed 84% of 2017 and
prior claims during 2018, an affirmation
of the short-tailed nature of our workers’
compensation business model.
We continue to believe that profitable
growth is available across Eastern’s 19
core state, five region operating platform.
Pennsylvania, the state in which Eastern
launched its operations in 1997, is the
only state with a mature market position.
Eastern will continue to evaluate organic
expansion and acquisition opportunities
based on a rigorous state strategy
assessment process and the ability
to either deliver profitable geographic
diversification or scale in a current
operating region.
SEGREGATED PORTFOLIO CELL
REINSURANCE SEGMENT
In 2018, consistent with the way we are
viewing our segregated portfolio cell
operations internally, ProAssurance
began reporting the results of
our alternative markets operation
separately in the Segregated Portfolio
Cell (SPC) Reinsurance segment.
Marketed under the brand Inova, our
alternative markets solution provides
agencies, companies, groups, and
associations the ability to share in
the underlying risk of an insurance
program in a segregated portfolio
cell at our reinsurance facility in
the Cayman Islands. ProAssurance
participates in the risk of specifically
selected SPCs, with ownership ranging
from 25% to 85% depending on their
risk profile. Our Specialty P&C and
Workers’ Compensation Insurance
segments receive fee-based revenue
derived from the insurance services
provided to the SPCs.
In 2018, the SPC Reinsurance segment
increased gross premiums by 9.5% to
$85 million, and posted a combined
ratio of 82.7%. The alternative markets
business continues to be very “sticky,”
renewing 22 of 23 programs with
premium renewal retention of 91%,
indicative of the continued success of
the Inova operation. The sales cycle
for these programs is long, given
the complexity involved; however, we
believe there is significant momentum
for additional cells involving both
professional liability and workers’
compensation insurance in the future.
LLOYD’S SYNDICATES SEGMENT
We realize the volatility that the Lloyd’s
investment has created in our results is
troubling to some of our investors.
Lloyd’s Syndicates 1729 and 6131, in
which we are invested through a capital
commitment of up to $200 million,
have made progress in growing into the
3
ANNUAL REPORT 2018 scale required to become successful.
Gross premiums written grew to $88.7
million, allowing the expense ratio to
remain level year-over-year, even as the
Syndicates increased staff to address
growth. However, these positives were
overshadowed by property catastrophe
losses related to the volcanic eruption
in Hawaii and Hurricanes Michael and
Florence. Together, those losses have
negated much of the good work of the
Syndicates and have resulted in our
decision to review our investment at
Lloyd’s. We understand the concern over
the volatility in our quarterly earnings
this business has created, and we
will consider the appropriate level of
our participation with the Syndicates,
methods to reduce that volatility, and the
overall future of this investment.
Our review of the Lloyd’s investment will
be comprehensive, and the only option
not under consideration is maintaining
the status quo. We are confident we will
reach a solution that will help position
the Syndicates for long-term success,
while addressing the concerns raised by
our investors.
As always, please consider our letter
an overview—we urge you to read the
accompanying Form 10-K for details of
our results and an in-depth discussion of
our strategy.
LOOKING AHEAD
ProAssurance’s results in 2018 were not
what we envisioned when the year began.
We correctly anticipated that our
specialty domestic insurance lines
would successfully navigate challenging
markets and would find success through
offering superior service and a clearly
differentiated product.
We did not project the catastrophe losses
that have prompted questions about our
Lloyd’s investment. We will answer those
questions in due time this year.
In all, 2018 was a year of many
positives and a few, albeit impactful,
negatives. While we do not know what
2019 holds, we remain committed to
a long-term strategy that will ensure
we have the financial strength and
operational expertise to accommodate
the changes that are certain to flow
from the transformation of the American
healthcare system, and will ensure our
responsiveness to the evolution of the
workers’ compensation market.
Ensuring our financial strength means
we must continually evaluate the
adequacy of our capital, knowing that
we must maintain a level of capital
that protects our insureds and our
Company from the threats of emerging
loss trends and is commensurate with
the opportunities we see emerging in
our lines of business. At the same time,
as we have demonstrated in the past,
we will not hesitate to return capital to
our shareholders in the most efficient
manner possible, if those threats do not
materialize and the opportunities do not
emerge as expected.
We will enter the second half of 2019 with
new leadership in our HCPL and workers’
compensation lines of business. Howard
Friedman, who for years has been the
President of our Healthcare Professional
Liability operations, will retire to a still-
important, but limited, role overseeing
our actuarial function. He is one of our
industry’s most respected underwriting
and actuarial experts and we will miss
his leadership, and will happily avail
ourselves of his continuing presence
within the Company. Howard’s decision
means a new role for Mike Boguski, the
President of Eastern, who will assume
the presidency of all our Specialty P&C
lines. Mike has guided Eastern from its
founding with unparalleled success in
every phase of its operations and he
will bring new insight into operational
excellence to our Specialty P&C
operations and will certainly build on the
fine foundation left by Howard Friedman.
Finally, Kevin Shook, formerly the Chief
Financial Officer at Eastern and now its
Executive Vice President, will step into
Mike’s role at Eastern, and our workers’
compensation operations will not miss
a beat. Kevin has worked hand-in-hand
with Mike for many years and we are
confident the transition will be smooth
and the upward trajectory at Eastern will
continue unabated.
Along with each of these executives, we
are privileged to lead an extraordinary
team of approximately 1,000 dedicated
employees. We close by thanking each
of them for their work, and each of our
investors for the confidence shown in us
as we strive to produce more rewarding
results in the years ahead.
W. STANCIL STARNES
Chairman and Chief Executive Officer
EDWARD L. RAND, JR.
President and Chief Operating Officer
4
COMMITTEES
INDEPENDENCE
AUDIT
COMPENSATION
EXECUTIVE
NOMINATING
& CORPORATE
GOVERNANCE
BOARD OF DIRECTORS
W. Stancil Starnes, Esq.
Chairman and Chief Executive Officer, ProAssurance
Kedrick D. Adkins, Jr
Retired Chief Financial Officer, Mayo Clinic
Bruce D. Angiolillo
Retired Partner, Simpson Thacher & Bartlett LLP
Samuel A. Di Piazza, Jr.
Chairman, Mayo Clinic Board of Trustees, Retired CEO of PricewaterhouseCoopers
Robert 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 Association
Katisha T. Vance, M.D.
Practicing Physician
Thomas A. S. Wilson, Jr., M.D.
Practicing Physician (Lead Director)
N
I
I
I
I
I
I
I
I
I
I
M
M
C E
M
C
M
M
C
M
M
M
N Management, Non-Independent
I
Independent
M Member
C Chairman
E
Financial Expert
EXECUTIVE OFFICERS
Michael L. Boguski, C.P.C.U.
President*
Specialty P&C
ProAssurance Corporation
Dana S. Hendricks
Executive Vice President and
Chief Financial Officer
ProAssurance Corporation
* Effective May 2019
Jeffrey P. Lisenby, Esq.
Executive Vice President,
Corporate Secretary and General Counsel
ProAssurance Corporation
Frank B. O’Neil, IRC.
Senior Vice President and
Chief Communications Officer
ProAssurance Corporation
Edward L. Rand, Jr.
President and Chief Operating Officer
ProAssurance Corporation
Kevin M. Shook
President*
Eastern Alliance Insurance Group
M
M
C
M
5
ANNUAL REPORT 2018 200
150
100
50
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, 2018, as well as the cumulative total shareholder return of the 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, 2018. 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.
TOTAL RETURN PERFORMANCE
$200
150
100
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
ProAssurance Corporation
S&P 500 Index
Russell 2000 Index
SNL Insurance P&C
12/31/13
100.00
100.00
100.00
100.00
12/31/14
101.35
113.69
104.89
114.85
PERIOD ENDING
12/31/15
114.10
115.26
100.26
118.80
12/31/16
146.37
129.05
121.63
140.21
12/31/17
164.58
157.22
139.44
160.30
12/31/18
121.90
150.33
124.09
154.12
ProAssurance®, Eastern Alliance®, Inova®, Medmarc®, ProAssurance Risk Solutions SM, Treated Fairly®, and the “Curl” device are registered trademarks
of ProAssurance Corporation or its subsidiaries. CAPAssurance SM is a registered trademark of the Cooperative of American Physicians, Inc. and is used
by permission. All Rights Reserved.
6
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, 2018,
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.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
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
No
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
No
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
No
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, a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Emerging growth company
(Do not check if a smaller reporting company)
Smaller reporting company
Accelerated filer
1
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the
Exchange Act.
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, 2018 was $1,865,211,215.
As of February 15, 2019, the registrant had outstanding approximately 53,640,178 shares of its common stock.
Documents incorporated by reference in this Form 10-K
(i)
The definitive proxy statement for the 2019 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
ASU
BEAT
Board
BOLI
CIMA
Council of Lloyd's
CODM
COSO
Commutation
DDR
Dodd-Frank Act
DPAC
Eastern Re
EBUB
EEA
ERM
FAL
FASB
FHLB
FHLMC
FIO
FNMA
GAAP
GDPR
GILTI
GNMA
HCPL
IBNR
Inova Re
IRS
LAE
LIBOR
LLC
Lloyd's
LP
Meaning
The Affordable Care Act
Allocated loss adjustment expense
Accumulated other comprehensive income (loss)
Accounting Standards Update
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
Chief Operating Decision Maker
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
European Economic Area
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
General Data Protection Regulation
Global intangible low-taxed income
Government National Mortgage Association
Healthcare professional liability
Incurred but not reported
Inova Re, LTD, S.P.C.
Internal Revenue Service
Loss adjustment expense
London Interbank Offered Rate
Limited liability company
Lloyd's of London market
Limited partnership
LPT
Medical technology liability
Model Holding Co. Law
Loss portfolio transfer
Medical technology and life sciences products liability
Model Insurance and Holding Company System Regulatory Act and Regulation
3
Term
NAIC
NAV
NFIP
NOL
NRSRO
NYDFS
NYSE
OCI
ORSA
OTTI
PCAOB
PICA
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
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
Other comprehensive income (loss)
Risk Management and Own Risk and Solvency Assessment Model Act
Other-than-temporary impairment
Public Company Accounting Oversight Board
Podiatry Insurance Company of America
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
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
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 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
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19
31
31
31
33
33
34
35
133
136
136
136
136
138
138
138
138
138
139
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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, including
the impact of Brexit;
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 laws or government regulations regarding financial markets or market activity that may affect 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;
6
the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
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 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.
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ITEM 1. BUSINESS
Overview
PART I
ProAssurance Corporation is a holding company for property and casualty insurance companies. For the year ended
December 31, 2018, our net premiums written totaled $835 million, and at December 31, 2018 we had total assets of $4.6
billion and $1.5 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 SPA, Syndicate 6131,
which began writing business effective January 1, 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 practicable after the report is electronically filed with, or furnished to, the SEC. 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 our Investor Relations department, 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; the most significant and recent of
which was the acquisition of Eastern Insurance Holdings, Inc., on January 1, 2014.
We provided the majority of the capital for Syndicate 1729 in November 2013, and Syndicate 1729 began active
operations effective January 1, 2014. We provided 100% of the capital for a SPA, Syndicate 6131, in December 2017, and
Syndicate 6131 began writing business 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.
• Provide superior workers' compensation products and services. We provide workers' compensation products and
services that focus on increasing an organization's productivity while reducing costs. We do this by providing
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innovative programs and solutions that address the specific needs of our customers and return injured workers to
wellness.
• 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.
• 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 actively manage our enterprise risk 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 practicable, we utilize formalized claims management processes and protocols as a means of
reducing claim costs.
• 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 financial strength and adequate capital.
Organization and Segment Information
During the third quarter of 2018, we altered our internal management reporting structure and the financial results
evaluated by our CODM; therefore, we changed our operating segments to align with how our CODM currently oversees the
business, allocates resources and evaluates operating performance. As a result of the segment reorganization, we added an
operating and reportable segment: Segregated Portfolio Cell Reinsurance.
We operate through multiple insurance organizations and report our operating results in five segments, as follows:
• Specialty P&C - This segment includes our professional liability business and medical technology liability
business. 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
underwriting results of SPCs that assume healthcare professional liability business were previously reported in this
segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.
• Workers' Compensation Insurance - This segment includes our workers' compensation insurance business which is
provided primarily to employers with 1,000 or fewer employees. Our workers' compensation products include
guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and
alternative market solutions. The underwriting results of SPCs that assume workers’ compensation business were
previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.
• Segregated Portfolio Cell Reinsurance - This segment reflects the operating results (underwriting profit or loss,
plus investment results) of SPCs at Eastern Re and Inova Re, our Cayman Islands SPC operations. The SPCs
assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two
from either our Workers' Compensation Insurance or Specialty P&C segments.
• Lloyd's Syndicates - This segment includes the operating results from our participation in Lloyd's of London
Syndicates 1729 and 6131. Syndicate 6131 is a SPA that began writing business effective January 1, 2018. The
results of this segment are normally reported on a quarter delay, except when information is available that is
material to the current period. Syndicate 1729 underwrites risks over a wide range of property and casualty
insurance and reinsurance lines in both the U.S. and international markets while Syndicate 6131 focuses on
contingency and specialty property business, also within the U.S. and international markets.
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• Corporate - 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 either SPC operations
or Lloyd's Syndicate operations. The results of investment assets solely allocated to SPC operations were
previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.
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, 2018, 2017 and 2016 were comprised as follows:
($ in thousands)
2018
2017
2016
Year Ended December 31
Specialty P&C (1)
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance (2)
Lloyd's Syndicates (3)
Inter-segment revenues (2)(3)
Total
$ 577,196
293,230
60% $ 549,323
31%
264,048
85,086
88,746
(86,947)
$ 957,311
77,675
9%
9%
(9%)
70,224
(86,394)
100% $ 874,876
63% $ 535,725
30%
9%
248,875
72,221
8%
65,157
(86,964)
(10%)
100% $ 835,014
64%
30%
9%
8%
(11%)
100%
(1) Primarily comprised of one-year term policies, but includes premium related to policies with a two-year term of $22.2 million in 2018,
$27.4 million in 2017 and $21.9 million in 2016.
(2) Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% assumed from either our Workers' Compensation Insurance or
Specialty P&C segments. We eliminate this inter-segment revenue.
(3) Our written premium includes our participation in Syndicates 1729 and 6131, including casualty premium assumed by Syndicate 1729
from our Specialty P&C segment through a quota share reinsurance agreement. Syndicate 1729 did not renew the quota share reinsurance
agreement with our Specialty P&C segment on January 1, 2018; however, gross premiums written for the year ended December 31, 2018
included one quarter of cession due to the previously mentioned quarter delay. We eliminate this inter-segment revenue.
Because our investments and other assets are predominately managed at the Corporate level we do not allocate assets to
segments for financial reporting purposes. 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 Lloyd's Syndicates 1729 and
6131, we had net written premium of $29.3 million in 2018, $21.3 million in 2017 and $12.2 million in 2016 associated with
insurance exposures outside of the U.S.
Specialty Property and Casualty Segment
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance.
Professional liability insurance is primarily offered to healthcare providers and institutions and, to a lesser extent, 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.
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.
Our custom alternative risk solutions include complex risk valuation solutions and a loss portfolio transfer program for
large healthcare entities who, most commonly, are exiting a line of business, changing an insurance approach or simply
preferring to transfer risk. Our custom alternative risk solutions also include a turnkey captive solution whereby all or a portion
of the healthcare premium written is ceded to certain SPCs of our wholly owned Cayman Islands reinsurance subsidiaries,
Eastern Re and Inova Re, which are reported in our Segregated Portfolio Cell Reinsurance segment. The portion not ceded to
the SPCs is retained within our Specialty P&C segment. Our Specialty P&C segment does not currently participate in the cells
that assume HCPL premium; therefore, the segment retains no underwriting profit or loss. Total alternative market gross
premiums written in this segment were approximately $5.8 million and $4.3 million during 2018 and 2017, respectively.
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We utilize independent agencies and brokers as well as an internal sales force to write our HCPL business. For the year
ended December 31, 2018, approximately 61% 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 2018, our ten largest agents or
brokers produced approximately 23% of our HCPL premium; individually, no one agency or broker 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 in select areas of practice; and this is a less significant portion
of our business, accounting for approximately 3% of our 2018 gross premiums written. Our legal professional liability business
offers errors and omissions liability insurance policies for law firms engaged in the private practice of law. The program
generally insures solo practitioner and smaller firms; over 97% of our insured attorneys are members of a firm employing five
or fewer attorneys. The areas of practice of our insured firms include plaintiff, real estate, criminal defense and general
corporate law. The program does not insure firms practicing in areas that are considered high hazard such as securities and
intellectual property law.
Underwriting decisions for our legal professional liability coverage consider the firm’s areas of practice, the experience of
the attorneys and the management controls and loss mitigation practices of the applicant. Our legal professional liability line of
business operates in 32 states written through independent brokers. Brokers are appointed and must specialize in legal
professional liability. The territory of appointed brokers is restricted to a state or a small number of states in order to maintain a
level of exclusivity.
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 2018, our top ten largest brokers generated
approximately 49% of our medical technology liability gross written premium, with no one broker representing more than 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 Insurance Segment
Our Workers' Compensation Insurance 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 workers' compensation premium written is 100% ceded to either the SPCs at Eastern Re or Inova Re,
which are reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, unaffiliated
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captive insurers. Alternative market products include program design, fronting, claims administration, risk
management, SPC rental, asset management and SPC management services. Of our total alternative market
premiums written, approximately 95% in 2018 and 92% in 2017 was ceded to the SPCs operated through Eastern
Re or Inova Re.
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. Our goal is to underwrite 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 $2.7 million and $4.6 million in this unit
in 2018 and 2017, respectively.
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.
Segregated Portfolio Cell Reinsurance Segment
Our Segregated Portfolio Cell Reinsurance segment reflects the operating results (underwriting profit or loss, plus
investment results) of SPCs at Eastern Re and Inova Re, our Cayman Islands SPC operations. The SPCs assume workers'
compensation insurance, healthcare professional liability insurance or a combination of the two from the Workers'
Compensation Insurance and Specialty P&C segments. Each SPC is owned, fully or in part, by an agency, group or association
and the operating results of the SPCs are due to the participants of that cell. 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 participants in accordance with the
terms of the cell agreements. We participate to a varying degree in the results of certain SPCs and, for the SPCs in which we
participate, our participation interest is as low as 25% and as high as 85% as of December 31, 2018. In addition, the Segregated
Portfolio Cell Reinsurance segment includes the SPCs' investment results as the investments are solely for the benefit of the cell
participants and investment results due to external cell participants are reflected in the SPC dividend expense. The segment
operating results reflect our share of the underwriting and investment results of the SPCs in which we participate.
During the first quarter of 2018, we restructured our Cayman Islands SPC operations. Beginning in 2018, all new and
renewing alternative market business previously ceded to the SPCs at Eastern Re, with the exception of one program, is now
ceded to SPCs operated by a newly formed wholly owned Cayman Islands subsidiary, Inova Re. As part of the restructuring, all
SPCs previously operated by Eastern Re, with the exception of one program, ceased assuming new and renewing business on or
after January 1, 2018. The external cell participants' cumulative undistributed earnings and the results of all SPCs for the
current period due to external cell participants continue to be reported as SPC dividends payable and SPC dividend expense,
respectively.
The marketing and distribution of alternative market policies are the same as that of the segment from which the policy
was assumed: Workers' Compensation Insurance or Specialty P&C segments.
Lloyd's Syndicates Segment
Our Lloyd's Syndicates segment includes operating results from our participation in Syndicates 1729 and 6131. 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 2019 of up to $200
million, referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022. For the
2019 underwriting year, our FAL was comprised of investment securities deposited with Lloyd's which at December 31, 2018
had a fair value of approximately $142.7 million.
Lloyd's Syndicate 1729
We are the majority capital provider to Syndicate 1729 with the remaining capital provided by unrelated third parties,
including private names and other corporate members. For the 2019 underwriting year, we slightly decreased our participation
in the operating results of Syndicate 1729 from 62% to 61%. Syndicate 1729 covers a range of property and casualty insurance
and reinsurance lines, primarily for risks within the U.S. as well as international markets, and for the 2019 underwriting year
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has a maximum underwriting capacity of £128 million (approximately $163.3 million at December 31, 2018), of which £78
million (approximately $99.5 million at December 31, 2018) is our allocated underwriting capacity as a corporate member.
Lloyd's Syndicate 6131
Beginning in the second quarter of 2018, our Lloyd's Syndicates segment includes the operating results of a SPA,
Syndicate 6131, which began writing business effective January 1, 2018. 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 focuses on contingency and specialty property business, primarily for risks within the
U.S. as well as international markets. For the 2019 underwriting year, Syndicate 6131 has a maximum underwriting capacity of
£12 million (approximately $15.3 million at December 31, 2018).
Our Lloyd's Syndicates segment products are distributed principally through retail brokers and coverholders (i.e., only
those authorized by our retail brokers to enter into a contract but only in accordance with specified terms), which consist
primarily of premium written through open-market channels and delegated underwriting authority arrangements. Our Lloyd's
Syndicates write business in the Lloyd's marketplace and have access to international markets across the world.
Corporate Segment
Our Corporate segment includes our investment operations, other than those reported in our Segregated Portfolio Cell
Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The segment also includes non-premium
revenues generated outside of our insurance entities and corporate expenses. 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 and price
competition, including the leveraging of workers’ compensation business by multi-line insurers, continues to impact our
renewal retention rate and we expect the trend to continue in 2019. 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.
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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.
Our ability to service current debt and potential debt is regularly evaluated and rated by four rating agencies: A.M. Best,
S&P, Fitch and Moody’s. 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.
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 reflect 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.
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Insurance Regulation Concerning Cybersecurity
In March 2017, the New York Cybersecurity Regulation took effect for financial institutions, insurers and other
companies regulated by the NYDFS. The intent of the regulation is to encourage the protection of consumer information, as
well as the technology systems of NYDFS regulated entities. We are currently compliant with the regulation according to the
transition periods as defined in the NYDFS Cybersecurity Regulation.
In October 2017, the NAIC adopted the Insurance Data Security Model Law, which created rules for insurers, agents and
other licensed entities covering data security and investigation and notification of breach. In May 2018, the European Union
implemented the GDPR, designed to protect data privacy of individuals within the European Union and the EEA. We are
compliant with the GDPR due to the global nature of our business, including a small amount of international activity in our
Specialty P&C segment. In addition, managing agents of Lloyd's syndicates are required to ensure that they meet the
requirements of the GDPR and any local data protection regulation based on territories in which they operate. Syndicate 1729
and Syndicate 6131, including their managing agent, are compliant with the GDPR.
Additionally, South Carolina enacted the South Carolina Department of Insurance Data Security Act effective January 1,
2019. California's Consumer Privacy Act of 2018 will go into effect January 1, 2020, and Michigan's Data Security Act will go
into effect January 20, 2021. Ohio enacted the Data Protection Act which went into effect November 2, 2018. These regulations
require 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. The GDPR and the California Consumer Privacy
Act of 2018 grant individuals the right to request that a company delete or de-identify their personal information. We expect
other states, including our states of domicile, to either adopt the NAIC's Insurance Data Security Model Law or enact their own
data security regulations. We do not expect compliance with the Insurance Data Security Model Law, the South Carolina
Department of Insurance Data Security Act, the California Consumer Privacy Act, Michigan's Data Security Act and Ohio's
Data Protection Act to have a material impact on our financial condition or results of operations, as they closely resemble the
NYDFS Cybersecurity Regulation.
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, 2018, 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
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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 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, 2018, all states have adopted the Model Holding Co. Law and 49 states have adopted ORSA. ProAssurance was
not required to file an internal assessment of solvency under the ORSA criteria in 2018.
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.
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
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,
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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 amends or repeals 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. In
March 2018, this legislation was passed by the U.S. Senate and signed into law by the President of the U.S. in May 2018.
Although the potential impacts of the Dodd-Frank Act and potential amendments to the Dodd-Frank Act, such as the
Financial CHOICE Act, on the U.S. insurance industry are not clear, our business could be affected by changes to the U.S.
system of insurance regulation.
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; however, Congress subsequently extended the program through February 2018. Since
then, the NFIP has received multiple short-term extensions and currently expires in May 2019. 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.
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. 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 6 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 2019 a loss event must exceed $180 million to trigger coverage and that the federal government
will reimburse 81% 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.
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International
Cayman Islands
Our SPC business operates through our subsidiaries, Eastern Re and Inova Re, which are organized and licensed as
Cayman Islands unrestricted Class B insurance companies. Eastern Re and Inova Re are subject to regulation by the CIMA.
Applicable laws and regulations govern the types of policies that Eastern Re and Inova Re can insure or reinsure, the amount of
capital they must maintain and the way it can be invested, and the payment of dividends without approval by the CIMA.
Eastern Re and Inova Re are required to maintain minimum capital of approximately $200,000 and must receive approval from
the CIMA before they 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 and the
legal deadline for the U.K. to withdraw from the European Union is set for March 2019. 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. Until the withdrawal is finalized, Lloyd's is currently permitted to operate without the need for additional
licensing or authorization from each individual country. In November 2018, Lloyd's opened a new European insurance
company in Brussels in order to maintain access to European Union business for the 2019 renewal season. Lloyd's Brussels is
Lloyd's first Europe wide operation and will bring Lloyd's expertise closer to its customers and partners in Europe. Lloyd's
Brussels will also be moving all legacy EEA business to Brussels by the end of 2020 via a Part VII portfolio transfer, which
allows insurers and reinsurers to transfer portfolios of insurance business from one legal entity to another, subject to court
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.
Employees
At December 31, 2018, we had 991 employees, none of whom were represented by a labor union. We consider our
employee relations to be good.
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.
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ITEM 1A. RISK FACTORS.
There are a number of factors, many beyond our control, which may cause results to differ significantly from our
expectations. Through our ERM program, as previously discussed, we have attempted to identify and understand the nature,
caliber and sensitivity of material foreseeable risks, mitigate or avoid those risks and determine a course of action necessary to
address such risks. These risk factors fall under the following three categories: Insurance, Financial and Operational. 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
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,
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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
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 use analytical models to assist our decision-making in key areas such as pricing and reserving and may be adversely
affected if actual results differ materially from the model outputs and related analyses.
We use various modeling techniques and data analytics to analyze and estimate exposures, loss trends and other risks
associated with our assets and liabilities. This includes both proprietary and third party modeled outputs and related analyses to
assist us in decision-making and maintain a competitive advantage. The modeled outputs and related analyses from both
proprietary and third parties are subject to various assumptions, uncertainties, model design errors and the inherent limitations
of any statistical analysis, including those arising from the use of historical internal and industry data and assumptions. In
addition, the effectiveness of any model can be degraded by operational risks including, but not limited to, the improper use of
the model. Consequently, actual results may differ materially from our modeled results. The profitability and financial
condition of the Company substantially depends on the extent to which our actual experience is consistent with assumptions we
use in our models and ultimate model outputs. If, based upon these models or other factors, we misprice our products or fail to
appropriately estimate the risks we are exposed to, our business, financial condition, results of operations or liquidity may be
adversely affected.
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.
20
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 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.
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.
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 15, 2019.
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
Inova 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)
NR
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
NR
Moody’s
(www.moodys.com)
A2
A2
NR
A2
NR
NR
NR
NR
A3
A3
NR
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.
In addition to the evaluation of our claims paying ability, four 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.
21
Our business could be adversely affected by the loss or consolidation of independent agents, agencies, 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.
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 Syndicates, we 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.
Financial
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.
At December 31, 2018 our receivable from reinsurers on unpaid losses and loss adjustment expenses was $344 million
and our receivable from reinsurers on paid losses and loss adjustment expenses was $12 million. As of December 31, 2018, no
reinsurer, on an individual basis, had an estimated net amount due which exceeded $36 million.
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.
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 shareholders’ equity, income and/or cash flows.
22
Our investments are subject to credit, prepayment and other risks.
A significant portion of our total assets ($3.3 billion or 73%) at December 31, 2018 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, 2018 approximately 13% 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, 2018 the fair value of our state/municipal portfolio was $293.8 million (amortized cost basis of $289.5
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. 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. 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, 2018 the carrying value of our tax credit
partnership interests was approximately $69.4 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.
At December 31, 2018 and in accordance with applicable GAAP, we valued 95% of our investments at fair value and the
remaining 5% 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, 2018, we valued approximately 20% 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 utilize judgment. At December 31, 2018 approximately
66% 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 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, 2018 approximately 9% 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 funds valued at NAV have various redemption
requirements and lock-up provisions (see Note 2 of the Notes to the Consolidated Financial Statements for further information).
23
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
(0.16 to 1.0 at December 31, 2018) 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.
The interest rates on our mortgage loans and Revolving Credit Agreement are priced using a spread over LIBOR, which may
be phased out in the future.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a
reference for setting interest rates on loans globally. The terms of certain of our debt agreements include interest rates which are
calculated based on LIBOR.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends
to phase out LIBOR by the end of 2021. It is unclear if at that time whether or not LIBOR will cease to exist or if new methods
of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction
with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions,
announced replacement of U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by
U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in
April 2018 and was subsequently codified by the FASB in October 2018. The updated codification added the overnight index
swap rate ("OIS") based on the SOFR to the list of U.S. benchmark interest rates that are eligible to be hedged. As a result,
entities may designate changes in the OIS rate as the hedged risk in hedges of interest rate risk for fixed-rate financial
instruments beginning in January 2019. If LIBOR ceases to exist, we may need to renegotiate our mortgage loans and
Revolving Credit Agreement that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new
standard that is established.
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
included 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 Company has reinsurance operations domiciled in the Cayman
Islands, changes in the tax laws of the Cayman Islands 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, 2018 we had a federal income tax receivable
of approximately $3.5 million. We also had a liability for unrecognized current tax benefits of $3.6 million, and we had a net
deferred tax asset of approximately $29.1 million.
24
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.
Operational
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, 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.
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.
25
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. 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. In
March 2018, this legislation was passed by the U.S. Senate and signed into law by the President of the U.S. in May 2018.
Although the potential impacts of the Dodd-Frank Act and potential amendments to the Dodd-Frank Act, such as the
Financial CHOICE Act, on the U.S. insurance industry are not clear, our business could be affected by changes to the U.S.
system of insurance regulation.
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.
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 39% of our direct premiums
written for the year ended December 31, 2018. Moreover, on a combined basis, Pennsylvania, Alabama and Indiana accounted
for 30% of our direct premiums written for each of the years ended December 31, 2018, 2017 and 2016. 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
26
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.
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, brokers, insureds or internal staff could result in a loss of revenue for
the Company.
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.
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."
27
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.
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 two subsidiaries 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 Islands subsidiaries, which could potentially
impact profitability of alternative market solutions offered through these subsidiaries.
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.
The U.K.'s referendum vote in favor of leaving the European Union could have a material effect on our operations.
In June 2016, the U.K. approved a referendum to exit the European Union, commonly referred to as "Brexit" as described
in Part I under the heading "Insurance Regulatory Matters." The possible exit of the U.K. from the European Union could result
in significant macroeconomic deterioration including, but not limited to, a decrease in global stock exchange indices and an
increase in foreign exchange volatility (in particular a further weakening of the pound sterling against the U.S. dollar). The full
effects of Brexit are uncertain and will depend on any agreements the U.K. may make to retain access to European Union
markets. However, we do not expect Brexit to have a material effect on our Lloyd's Syndicate operations as Lloyd's has opened
a new European insurance company in Brussels in order to maintain access to European Union business for the 2019 renewal
season (see further discussion in Part I under the heading "Insurance Regulatory Matters").
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 2018, 2017 or 2016. Our practice is to accrue for insurance insolvencies when notified of
28
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
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 2018, 2017 or 2016.
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 we most recently paid a $0.81 per share dividend for
the three months ended December 31, 2018, which included a $0.50 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.
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 restrictions 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 security, integrity and availability 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. We collect, use, store or transmit an increasingly large amount
of confidential, proprietary and other information in connection with the operation of our business. Therefore, the Company has
focused resources on securing and preserving the integrity of our data processing systems and related data. Despite our efforts
to ensure the integrity of our systems, we are increasingly exposed to the risk that our technology infrastructure could be
subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering.
29
The Company also evaluates the integrity and security of the technology infrastructure of third parties that access, process
or store data that the Company considers to be significant. While we review and assess our third party providers' cybersecurity
controls, as appropriate, and make changes to our business processes to manage these risks, 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 a financial, legal and reputational perspective. We continually enhance our cyber and information
security in order to identify and neutralize emerging threats and improve our ability to prevent, detect and respond to attempts
to gain unauthorized access to our data and systems. We regularly add additional security measures to our computer systems
and network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing.
However, it is impossible to defend against every risk being posed by changing technologies. The Company has a formal
process in place for identifying, handling and disclosing of cybersecurity incidents. In addition, the Company's Board and Audit
Committee are involved in the oversight of our cybersecurity policies and procedures and are continually updated on material
cybersecurity risks and cybersecurity issues, if any, faced by executive management. To date, the Company has not suffered
any material harm or loss relating to cyber-attacks or other security breaches at the Company or its third parties.
30
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 9 of the Notes to Consolidated Financial Statements included herein.
31
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
Mr. Starnes was appointed as Chief Executive Officer in 2007 and has served as the Chairman of
the Board since 2008. Mr. Starnes served as President of ProAssurance from 2012 to December
2018. 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 70)
Edward L. Rand, Jr. Mr. Rand was appointed as Chief Operating Officer and President of ProAssurance in 2018. Mr.
Rand was appointed as an Executive Vice President in 2014. Mr. Rand also has served as President
of our Medmarc subsidiary since 2016. Mr. Rand has previously served as Chief Financial Officer
and Senior Vice President of Finance. 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 52)
Howard H. Friedman 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 60)
Dana S. Hendricks
Jeffrey P. Lisenby
Ms. Hendricks was appointed as our Chief Financial Officer in 2018. Ms. Hendricks has previously
served as Senior Vice President of Business Operations for our PICA subsidiary. Prior to that time,
Ms. Hendricks served PICA as Vice President of Finance and Corporate Controller. Prior to joining
PICA in 2001, Ms. Hendricks held various finance and data analysis positions with American
General Life & Accident Insurance Company. Ms. Hendricks is a Certified Public Accountant.
(Age 51)
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 50)
Frank B. O’Neil
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 65)
Michael L. Boguski
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
56)
Ross E. Taubman
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 also
served as President of The American Podiatric Medical Association (APMA) from 2008 through
2009, and served in a number of executive leadership positions for the APMA. Dr. Taubman is a
diplomate in the American Board of Podiatric Surgery. (Age 61)
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 our Investor Relations department either by mail at P.O. Box 590009,
Birmingham, Alabama 35259-0009, or by telephone at (205) 877-4400 or (800) 282-6242.
32
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 15, 2019, ProAssurance Corporation had 3,028 stockholders of record and 53,640,178 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*
2018
2017
High
56.00
48.20
49.40
46.28
Low
47.35
35.35
35.50
37.18
$
$
$
$
Dividends Declared
2018
0.31
0.31
0.31
0.81
2017
0.31
0.31
0.31
5.00
$
$
$
$
$
$
$
$
$
$
$
$
High
61.85
62.45
61.80
63.00
Low
53.90
57.80
51.30
55.00
$
$
$
$
Dividends Paid
2018
5.00
0.31
0.31
0.31
2017
5.00
0.31
0.31
0.31
$
$
$
$
$
$
$
$
$
$
$
$
* Includes a special dividend of $0.50 and $4.69 per common share declared in 2018 and 2017, respectively.
The Board declared a quarterly dividend in each quarter of 2018 and 2017. Each dividend was paid in the month
following the quarter in which it was declared. The Board also declared special dividends of $0.50 and $4.69 per common
share during the fourth quarters of 2018 and 2017, respectively, 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, 2018.
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)
582,409
—
(b)
$—
—
Number of securities
remaining available
for future issuance
under equity compensation
plans (excluding securities reflected
in column (a))
(c)
*
1,976,325
—
* No outstanding options as of December 31, 2018. Other outstanding share units have no exercise price.
33
Issuer Purchases of Equity Securities
Period
October 1 - 31, 2018
November 1 - 30, 2018
December 1 - 31, 2018
Total
Total Number of
Shares Purchased
—
—
—
—
Average
Price Paid
per Share
N/A
N/A
N/A
$—
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)
$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)
2018
2017
2016
2015
2014
Year Ended December 31
Selected Financial Data
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
Net income per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Balance Sheet Data, as of December 31
Total investments
Total assets (1)
Reserve for losses and loss adjustment
expenses
Debt less debt issuance costs (1)
Total liabilities (1)
Total capital
Total capital per share of common stock
outstanding
$
$
$
$
$
$
$
$
$
$
$
957,311
818,853
91,884
$
$
$
8,948
$
(43,488) $
9,833
$
886,030
$
593,210
$
47,057
$
874,876
738,531
95,662
8,033
16,409
7,514
866,149
469,158
107,264
0.88
0.88
$
$
2.01
2.00
$
$
$
$
$
$
$
$
$
$
$
835,014
733,281
100,012
$
$
$
812,218
694,149
108,660
$
$
$
(5,762) $
$
34,875
$
7,808
$
870,214
$
443,229
$
151,081
3,682
$
(41,639) $
$
7,227
$
772,079
$
410,711
$
116,197
779,609
699,731
125,557
3,986
14,654
8,398
852,326
363,084
196,565
2.84
2.83
$
$
2.12
2.11
$
$
3.32
3.30
53,598
53,749
53,393
53,611
53,216
53,448
54,795
55,017
59,285
59,525
$ 3,349,382
$ 3,686,528
$ 3,925,696
$ 3,650,130
$ 4,009,707
$ 4,600,726
$ 4,929,197
$ 5,065,181
$ 4,906,021
$ 5,167,375
$ 2,119,847
$ 2,048,381
$ 1,993,428
$ 2,005,326
$ 2,058,266
$
287,757
$
411,811
$
448,202
$
347,858
$
248,215
$ 3,077,724
$ 3,334,402
$ 3,266,479
$ 2,947,667
$ 3,009,431
$ 1,523,002
$ 1,594,795
$ 1,798,702
$ 1,958,354
$ 2,157,944
Common stock outstanding, period end
53,637
53,457
53,251
53,101
$
28.39
$
29.83
$
33.78
$
36.88
$
38.17
56,534
(1) For all periods presented, debt is shown net of unamortized debt issuance costs which were previously reported as a part of other assets.
34
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
ProAssurance Corporation is a holding company for property and casualty insurance companies. 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 and the sole capital provider for Syndicate 6131 at Lloyd's of
London.
We operate in five segments which are based on our internal management reporting structure for which financial results
are regularly evaluated by our CODM to determine resource allocation and assess operating performance. During the third
quarter of 2018, we reorganized our segment reporting and as a result, the number of our segments increased from four to five,
described as follows:
• Specialty P&C - This segment includes our professional liability business and medical technology liability
business. Professional liability insurance is primarily offered to healthcare providers and institutions and, to a
lesser extent, 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 underwriting results of SPCs that assume healthcare professional liability business were previously
reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.
• Workers' Compensation Insurance - This segment includes our workers' compensation insurance business which is
provided primarily to employers with 1,000 or fewer employees. Our workers' compensation products include
guaranteed cost, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative
market solutions. The underwriting results of SPCs that assume workers’ compensation business were previously
reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.
• Segregated Portfolio Cell Reinsurance - This segment reflects the operating results (underwriting profit or loss,
plus investment results) of SPCs at Eastern Re and Inova Re, our Cayman Islands SPC operations. The SPCs
assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two
from our Workers' Compensation Insurance and Specialty P&C segments.
• Lloyd's Syndicates - This segment includes the operating results from our participation (62% for 2018) in Lloyd's
of London Syndicate 1729 and our 100% participation in Syndicate 6131, which is a SPA that began writing
business effective January 1, 2018. For the 2019 underwriting year, we slightly decreased our participation in the
operating results of Syndicate 1729 from 62% to 61%. The results of this segment are normally reported on a
quarter delay, except when information is available that is material to the current period. Syndicate 1729
underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S. and
international markets while Syndicate 6131 focuses on contingency and specialty property business, also within the
U.S. and international markets.
• Corporate - This segment includes our investment operations, other than those reported in our Segregated Portfolio
Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The results of
investment assets solely allocated to SPC operations were previously reported in this segment and are now reported
in our Segregated Portfolio Cell Reinsurance segment. This segment also includes non-premium revenues
generated outside of our insurance entities and corporate expenses.
All prior period segment information has been recast to conform to the current period presentation and the segment
reorganization had no impact on previously reported consolidated financial results. Additional information regarding our
segments is included in Note 16 of the Notes to Consolidated Financial Statements, Part I and the Segment Operating Results
sections that follow.
35
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 largest product line in our gross premiums written (49% in 2018, 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 which currently represents the second largest product line in our gross premiums written (31% in 2018,
including alternative market premiums). The workers’ compensation industry is highly competitive in the geographic markets
in which we operate and multi-line insurers continue to increase their leverage of workers’ compensation business in their
product offerings. We believe our workers' compensation products allow us to provide flexibility in offering 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.
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 establishing 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
2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61%.
Syndicate 1729 has a maximum underwriting capacity of £128 million (approximately $163.3 million at December 31, 2018)
for the 2019 underwriting year, of which £78 million (approximately $99.5 million at December 31, 2018) is our allocated
underwriting capacity as a corporate member.
Late in 2017, we began providing 100% of the capital for the newly formed SPA, Syndicate 6131. Syndicate 6131, which
began writing business effective January 1, 2018, serves as a quota share reinsurer to Syndicate 1729 and focuses on
contingency and specialty property business. For the 2019 underwriting year, Syndicate 6131 has a maximum underwriting
capacity of £12 million (approximately $15.3 million at December 31, 2018). We have a total capital commitment to support
our Lloyd's Syndicate operations through 2019 of up to $200 million, referred to as FAL. The Board, through a non-binding
resolution, extended this commitment through 2022. See further discussion in our Segment Operating Results - Lloyd's
Syndicates 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.
36
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.
In evaluating our performance, we consider a number of performance measures, including the following:
• The net loss ratio which is calculated as net losses incurred divided by net premiums earned and is a component of
underwriting profitability.
• The underwriting expense ratio which 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 which is the sum of the net loss ratio and the underwriting expense ratio and measures
underwriting profitability.
• The investment income ratio which 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 which is the combined ratio, less the investment income ratio. This ratio provides the combined
effect of underwriting profitability and investment income.
• The tax ratio which is calculated as total income tax expense divided by income (loss) before income taxes and
measures our effective tax rate.
• ROE which is calculated as net income 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 which 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, 2018 was approximately 9.7%.
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, these activities, such as insurance agency services, do not constitute a significant use of
our resources or a significant source of revenues or profits.
37
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, 2018 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 both to assess the viability of a claim and potential damages, if
any, and to 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, applicable only in periods in which acquisitions
occur (the acquired reserve). A summary of the activity in our net reserve for losses during 2018, 2017 and 2016 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
38
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 (75% of our consolidated gross reserve for losses and loss adjustment expenses
as of December 31, 2018), 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. The current accident year
reserve also includes provisions for any loss portfolio transfers we enter into during the current period. 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%.
Changes in observed claim frequency and/or severity can result in variations from these levels. The reasons for the variability
in loss provisions from period to period have included additional loss activity within our excess and surplus lines business,
provisions for losses in excess of policy limits, adjustments to ULAE, adjustment to the reserve for the DDR 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 vary from 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 as of December 31, 2018).
The risks insured in our medical technology liability business (4% of our consolidated gross reserve for losses and loss
adjustment expenses as of December 31, 2018) are more varied, and policies are individually priced based on the risk
characteristics of the policy and the account. The insured risks range from startup operations to large multinational entities and
the larger entities often have significant deductibles or self-insured retentions. 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 Insurance Segment. Many factors affect the ultimate losses incurred for our workers'
compensation coverages (11% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31,
2018) 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
state 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.
Segregated Portfolio Cell Reinsurance Segment. The factors that affect the ultimate losses incurred for the workers'
compensation and healthcare professional liability coverages assumed by the SPCs at Eastern Re and Inova Re (3% of our
consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018) are consistent with that of our
Workers’ Compensation Insurance and Specialty P&C segments, respectively.
Lloyd's Syndicates 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
Syndicates segment (4% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018).
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 delegated underwriting 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.
39
Syndicate 6131, which began writing business 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.
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 over 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 the Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance 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
40
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
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 Insurance segment and for the workers' compensation exposures in our Segregated
Portfolio Cell Reinsurance 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 Syndicates 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, 2018 was $1.5 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
41
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 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 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 to our pricing models for this business component. Our current HCPL pricing models assume a severity trend of
approximately 3% in most states and products. We have observed potentially higher severity trends in our case reserve
estimates but these have not yet 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.
Although the future degree and impact of the ultimate severity trend remains uncertain 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 had
generally resulted in rate reductions as claim frequency declined and remained at historically low levels. For example, on
average, excluding our podiatry business acquired in 2009, we had gradually reduced the premium rates we charged on our
standard physician renewal business (our largest HCPL line) by approximately 17% from the beginning of 2006 to December
31, 2016. However, from the beginning of 2017 to December 31, 2018, the average charged rates on our standard physician
renewal business have increased by 4% and we anticipate further rate increases due to indications of increasing loss severity.
Loss ratios for recent accident years have thus remained fairly constant because expected loss changes have been reflected in
our rates; however, we have recognized a higher current accident year net loss ratio during 2018 due to those recent severity
indications.
Workers' Compensation. The projection of changes in claim severity trend has not historically been an influential factor
affecting our analysis of workers' compensation 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 $92.1 million for the year ended December 31, 2018, of which
$77.1 million related to our Specialty P&C segment, $8.0 million related to our Workers' Compensation Insurance segment and
$9.0 million related to our Segregated Portfolio Cell Reinsurance segment, slightly offset by unfavorable development of $2.0
million related to our Lloyd's Syndicates segment.
Net favorable development recognized within our 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 average severity trend associated with the remaining HCPL claims is less than we had previously estimated, principally
related to accident years 2011 through 2014. The favorable development in our Specialty P&C segment for the year ended
December 31, 2018 included $13.3 million attributable to our medical technology liability line of business and $10.9 million
attributable to our legal professionals liability line of business.
Net favorable development recognized within the Workers' Compensation Insurance segment reflected overall favorable
trends in claim closing patterns primarily in the 2015 and 2016 accident years.
Net favorable development recognized within our Segregated Portfolio Cell Reinsurance segment primarily reflected
better than expected claim trends in the 2015, 2016 and 2017 accident years. The improved claim trends reflected lower
frequency and severity than anticipated at the time the reserves were established.
Net unfavorable development recognized within our Lloyd's Syndicates segment was driven by higher than expected
losses and development on certain large claims which resulted in unfavorable development with respect to a previous year of
account. See further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows.
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Loss Development by Line of Business
Professional Liability
Our professional liability line of business includes both our HCPL and legal professional lines, with our HCPL line
representing the largest component of our reserve. In support of our concern that the decline in frequency will result in a higher
severity trend for our HCPL claims, we saw our closed-with-indemnity-payment ratio (i.e., the number of claims closed with an
indemnity or loss payment as compared to the total number of closed claims) for our claims increase from 10% in 2005 to 15%
in 2018.
While this trend has been in keeping with our expectations, the anticipated increase in severity incorporated into our loss
assumptions has not occurred. Rather, we have experienced lower than expected severity which has been the primary driver of
the favorable development recognized in recent years.
The following table presents additional information about the loss development for our professional liability line of
business:
($ in thousands)
2018
2017
2016
Accident Years
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Prior to 2009
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2018
447,267
403,256
403,185
395,158
352,845
371,888
388,945
377,782
380,469
335,851
7,209,070
Reserve
Development
(favorable)
unfavorable
N/A
13,637
$
10,648
$
(1,268)
$
$ (16,627)
$ (20,398)
$ (13,403)
$ (13,940)
(4,268)
$
$
(5,558)
$ (12,616)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
18.0%
N/A
46.4%
N/A
66.4% $
3,413
80.8% $
1,510
89.4% $ (15,782)
94.7% $ (23,164)
97.4% $ (17,187)
97.8% $ (18,277)
99.1% $ (17,224)
99.5% $
(8,380)
$ (14,128)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
N/A
20.4%
N/A
48.2%
304
68.7% $
82.3% $ (11,358)
90.4% $ (10,501)
95.3% $ (24,988)
96.4% $ (15,977)
98.7% $ (14,532)
99.0% $ (19,920)
$ (28,674)
% of Known
Claims
Closed
N/A
N/A
17.6%
47.5%
71.8%
83.4%
92.0%
94.0%
97.6%
98.4%
An extended period of time is required to get a more precise estimate of the loss cost for a given accident year. As an
example, looking at the 2013 accident year for our professional liability reserves, we had resolved 83.4% of the known claims
by the end of 2016, 90.4% of the known claims by the end of 2017, and 94.7% of the known claims by the end of 2018. 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.
As a writer of third-party liability insurance, we have historically 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, 2018, 2017 and 2016 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.
43
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, 2018, 2017 and 2016 with respect to the three then most recent prior accident years:
($ in millions)
Prior accident years
2018
2015-2017
2017
2014-2016
2016
2013-2015
Net favorable (unfavorable) development
recognized for the specified years
Development as a % of established ultimates,
prior calendar year end
$
(23.0)
$
10.9
$
(2.0%)
0.9%
21.6
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)
2018
2017
2016
Accident Years
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Prior to 2009
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2018
14,105
14,228
12,473
10,832
11,971
5,312
9,867
9,608
24,330
20,876
534,144
Reserve
Development
(favorable)
unfavorable
N/A
(695)
(1,114)
(1,511)
(1,526)
(1,526)
585
(5,273)
1,449
(753)
(2,927)
$
$
$
$
$
$
$
$
$
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
52.4%
72.2%
62.8% $
64.6% $
93.2% $
98.7% $
98.8% $
99.8% $
99.6% $
99.7% $
$
N/A
N/A
(537)
(1,755)
(187)
(2,622)
(1,251)
92
(1,385)
(1,178)
(1,250)
N/A
42.2%
53.3%
79.5% $
92.5% $
96.4% $
96.9% $
73.9% $
96.3% $
95.7% $
$
N/A
N/A
N/A
(440)
(845)
(2,400)
(1,826)
(1,591)
(800)
(1,382)
(2,229)
N/A
N/A
26.4%
60.0%
81.7%
87.7%
90.5%
72.0%
90.6%
92.2%
Approximately $5.7 million of the $13.3 million total net favorable development recognized in 2018 related to the 2013
to 2016 accident years. The development for the 2013 to 2016 accident years represents a 12.3% reduction to the ultimates
established for those reserves at December 31, 2017. 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 $11.5 million total net favorable development recognized in 2016 related to the 2011 to 2013 accident years. The
development for the 2011 to 2013 accident years represents a 14.3% reduction to the ultimates established for those reserves at
December 31, 2015.
In 2018, 2017 and 2016 the development was largely attributable to favorable results from claims closed during the year.
As time has elapsed we have recognized that actual loss experience has on average been better than estimated. We have been
cautious in recognizing the improvement, but as claims have matured and claims are closed or have become more certain for
the remaining open claims, we have revised reserve estimates. We believe the need for a cautious approach is required as
outcomes are uncertain and results can be significantly affected by outcomes for a small number of cases.
44
Workers' Compensation
Claims in our workers’ compensation line of business have historically closed at a faster rate than in our HCPL or medical
technology liability lines of business. This faster disposition rate, along with a lower net retention after the application of
reinsurance, has resulted in less volatility in loss estimates on a net basis. However, a change in the number of individually-
severe claims can create volatility in a given accident year. The following table presents additional information about the loss
development for our workers' compensation line of business:
($ in thousands)
2018
2017
2016
Accident Years
2018
2017
2016
2015
2014
2013
2012
2011
2010
Prior to 2010
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2017
139,426
138,468
123,146
125,202
121,310
113,293
94,875
91,101
71,824
401,859
Reserve
Development
(favorable)
unfavorable
N/A
(4,203)
(8,257)
(1,998)
(92)
(227)
(565)
(60)
(54)
(11)
$
$
$
$
$
$
$
$
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
(7,546)
(5,773)
(1,428)
441
(308)
241
(42)
1,710
40.0%
80.8%
91.8% $
95.3% $
98.4% $
99.2% $
99.5% $
99.3% $
99.4% $
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
N/A
(3,452)
77
944
(577)
156
(820)
(782)
N/A
37.0%
82.5%
92.4% $
97.0% $
98.3% $
99.3% $
99.0% $
99.4% $
$
% of Known
Claims
Closed
N/A
N/A
41.3%
82.6%
92.5%
97.1%
98.4%
98.9%
99.3%
In 2018, we recognized $9.0 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment
and $8.0 million of net favorable development in our Workers' Compensation Insurance segment. In 2017, we recognized $8.5
million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $5.7 million of net favorable
development in our Workers' Compensation Insurance segment. In 2016, we recognized $4.6 million of net favorable
development in our Segregated Portfolio Cell Reinsurance segment and $1.6 million of net favorable development in our
Workers' Compensation Insurance segment. In each of the years ended December 31, 2018, 2017 and 2016, net favorable
development in our Workers' Compensation Insurance segment included $1.6 million related to the amortization of the
purchase accounting fair value adjustment.
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
$1.392 billion
Carried Net Reserve
$1.776 billion
High End Point
$2.227 billion
$1.497 billion
$1.776 billion
$2.030 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.
45
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, 2018, 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, 2018; 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, 2018, 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
20%
65%
1%
9%
95%
5%
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 investments are carried at
fair value. The fair value of our short-term securities approximates the cost of the securities due to their short-term nature.
46
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, for disclosure purposes 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 when events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. These assets include investments carried principally at cost,
investments in tax credit partnerships and equity method investments that do not provide a NAV, fixed assets, goodwill and
other intangible assets.
47
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, 2018, these investments represented approximately 5% 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:
Other, principally FHLB capital stock
$
2.9
Principally Cost
Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships
Equity method investments, primarily LPs/LLCs
BOLI
69.4
29.9
99.3
64.1
Equity
Equity
Cash surrender value
Total investments - Other valuation methodologies
$
166.3
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; or
• 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.
48
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.
These factors include, but are not limited to:
• our ability and intent to hold the investment until the recovery of its carrying value; and
• in situations where there was not a previous OTTI for the investment, 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; or
• in situations where there was a previous OTTI for the investment, whether the expected cash flows from the
investment at the time of the OTTI, primarily tax benefits, are less than its current 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.
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 reasons 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.
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, 2018 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.
A valuation allowance has been 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. In 2018, we also established a valuation allowance of $0.3 million against the deferred tax assets of certain
SPCs at our newly formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re. Due to the limited operations of
these newly formed SPCs as of December 31, 2018, management concluded that a valuation allowance was required. See
further discussion in Note 6 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
49
compensation that could qualify as a tax deduction, a change in how property and casualty taxpayers discount loss reserves, a
minimum tax on payments made to related foreign entities and a new tax on certain income of controlled foreign corporations.
See Note 6 of the Notes to Consolidated Financial Statements for discussion of the current status of our accounting for certain
provisions of the TCJA.
The TCJA placed limitations on the future deductibility of certain executive compensation. At December 31, 2017, the
IRS had not yet issued guidance in this area, and thus we made a reasonable estimate of the effects on our existing deferred tax
balances related to executive compensation at that time. During the third quarter of 2018, the IRS issued guidance addressing
the effects of the TCJA on executive compensation; therefore, we were able to complete our accounting for the impact of the
TCJA on our December 31, 2017 deferred tax asset balances related to executive compensation. As a result, we did not record
any measurement-period adjustments to the previously recorded provisional amount.
In computing taxable income, property and casualty insurance companies reduce their premiums earned by losses
incurred. The tax deduction for losses incurred is discounted using interest rates and factors prescribed by the IRS. The TCJA
modified the rules for discounting losses incurred by changing the definition of the applicable interest rate that is used and
amending the time periods for the loss payment pattern. These new provisions are effective for tax years beginning after
December 31, 2017 and are subject to a transition rule.
At December 31, 2017, the IRS had not yet released the information necessary for us to determine a reasonable estimate
for the tax effects of the TCJA on our deferred tax balances related to loss reserve discounting; therefore, no provisional amount
was recorded at that time. We were able to complete our analysis during the measurement period following the release of new
discount factors by the IRS on December 19, 2018. We used the new discount factors to determine the impact of the TCJA on
our deferred tax balances related to loss reserve discounting. The adjustment, which is referred to as the transition rule
adjustment, will be reflected as a component of taxable income evenly over eight years beginning in 2018. The transition rule
adjustment is a taxable temporary difference and has no impact on total tax expense for the current year. The ultimate impact of
the TCJA on our deferred tax balances for loss reserve discounting could be materially impacted if the IRS publishes any future
revisions to the loss discount factors used in our analysis.
Effective January 1, 2018, the TCJA introduced 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 for which a deduction is
allowed. Premiums we cede to the SPCs at our newly formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re,
do not fall within the scope of base erosion payments as the SPCs at Inova Re intend to elect to be taxed as U.S. taxpayers.
However, premiums that we cede to any active SPC at our other 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 have
evaluated our exposure to the BEAT and have concluded that our expected outbound deductible payments to related foreign
entities are below the threshold for application of the BEAT; therefore, we have not recognized any incremental tax expense for
the BEAT provision of the TCJA as of December 31, 2018. See further discussion on our new subsidiary, Inova Re, and our
Cayman Islands SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows.
The TCJA also requires a U.S. shareholder of a controlled foreign corporation to include its GILTI in U.S. taxable
income. The GILTI amount is based on the U.S. shareholder’s aggregate share of the gross income of the controlled foreign
corporation reduced by certain exceptions and a net deemed tangible income return. The net deemed tangible income return is
based on the controlled foreign corporation’s basis in the tangible depreciable business property. Cell rental fee income earned
by Inova Re and Eastern Re fall within the scope of the GILTI provisions of the TCJA. We have evaluated the new GILTI
provisions of the TCJA and we have made an accounting policy election to treat the taxes due on inclusions of GILTI in U.S.
taxable income as a current period expense when incurred.
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 2018 or 2017. At December 31, 2018, our
liability for unrecognized tax benefits approximated $3.6 million.
50
Goodwill
Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in
Note 16 of the Notes to Consolidated Financial Statements. Of the five reporting units, three have goodwill - Specialty P&C,
Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance. We evaluate goodwill for impairment annually
on October 1, upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair
value of goodwill may be impaired, and immediately before and after a reorganization that affects the composition of one or
more of our reporting units.
Annual Goodwill Impairment Test
When testing goodwill for impairment on our annual test date, 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. As of the most recent annual evaluation date on October 1, 2018, we
elected to perform a quantitative goodwill impairment assessment for our Specialty P&C, Workers' Compensation Insurance
and Segregated Portfolio Cell Reinsurance reporting units.
In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is determined using income
and market approaches and is compared to its carrying value, as described above. 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 derived from market information. 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. Because not all of our reporting units have goodwill, we
make certain assumptions regarding the fair value of our other reporting units in reconciling to our market capitalization.
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 of goodwill, if any. 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 fair value of goodwill. 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.
As a result of the quantitative assessments performed on October 1, 2018, management concluded that the fair value of
each of our three reporting units that have goodwill were greater than their carrying value as of the testing date; therefore,
goodwill was not impaired and no further impairment testing was required. No goodwill impairment was recorded in 2018,
2017 or 2016.
Goodwill Impairment Test - Result of Segment Reorganization
As discussed in Note 16 of the Notes to Consolidated Financial Statements, we reorganized our segment reporting in the
third quarter of 2018 to align with how our CODM currently oversees the business, allocates resources and evaluates operating
performance. As a result of the segment reorganization, we added an operating and reportable segment: Segregated Portfolio
Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment also became a reporting unit for purposes of testing
goodwill for impairment. We allocated goodwill to our revised reporting units using a relative fair value approach which
resulted in a nominal amount of goodwill reallocated from the Workers' Compensation Insurance reporting unit to the
Segregated Portfolio Cell Reinsurance reporting unit. We performed a quantitative goodwill impairment assessment for the
Workers' Compensation Insurance reporting unit immediately prior to the reallocation and a quantitative goodwill impairment
assessment for the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units immediately
after the reallocation and determined that no impairment existed.
We estimated the fair value of the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting
units using both an income approach and market approach using the same valuation methodologies and process for developing
assumptions that we use in our annual impairment assessment, as discussed above. To corroborate the reporting units’
valuation, we performed 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. Because we were not required to estimate the fair value of
51
all of our reporting units as part of this interim goodwill impairment assessment, we made certain assumptions regarding the
fair value of our other reporting units in reconciling to our market capitalization.
The Specialty P&C reporting unit's net operating results were not impacted by the segment reorganization and there was
no change to the amount of goodwill allocated to that reporting unit. Consequently, a quantitative goodwill impairment
assessment was not required for this reporting unit due to the segment reorganization.
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 or upon the
occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of the asset may be
impaired. The third quarter 2018 segment reorganization had no impact on how we evaluate our intangible assets for
impairment. 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 Syndicates segment, premiums are initially
recognized based upon estimates of ultimate premium. Estimated ultimate premium consists primarily of premium written
under delegated underwriting authority arrangements, which consist primarily of binding authorities, 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
We did not have any change in accounting estimate or policy that had a material effect on our results of operations or
financial position during 2018. We are not aware of any accounting changes not yet adopted as of December 31, 2018 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.
52
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. We
also charge our operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments a
management fee based on the extent to which services are provided to the subsidiary and the amount of gross premium written
by the subsidiary. At December 31, 2018, we held cash and liquid investments of approximately $236 million outside our
insurance subsidiaries that were available for use without regulatory approval or other restriction, of which $43 million was
used to pay shareholder dividends in January 2019. We also have $200 million in permitted borrowings under our Revolving
Credit Agreement and an accordion feature available which, if subscribed successfully, would allow another $50 million in
available funds. As of February 15, 2019, no borrowings were outstanding under our Revolving Credit Agreement.
During 2018, our operating subsidiaries paid dividends to us of approximately $178 million, including extraordinary
dividends from our insurance subsidiaries of approximately $48 million. Our insurance subsidiaries, in the aggregate, are
permitted to pay dividends of approximately $128 million over the course of 2019 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)
2018
2017
Change
Year Ended December 31
Net cash provided (used) by:
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
$ 177,265
214,897
(446,186)
(54,024) $
$ 173,388
200,275
(356,515)
17,148
$
$
$
3,877
14,622
(89,671)
(71,172)
(In thousands)
2017
2016
Change
Year Ended December 31
Net cash provided (used) by:
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
$
$ 173,388
200,275
(356,515)
17,148
$
$ 178,983
(288,802)
(13,934)
(5,595)
489,077
(342,581)
$ (123,753) $ 140,901
(In thousands)
2016
2015
Change
Year Ended December 31
Net cash provided (used) by:
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
$ 178,983
(288,802)
(13,934)
$ (123,753) $
$ 139,141
199,770
(294,851)
44,060
$
39,842
(488,572)
280,917
$ (167,813)
During the first quarter of 2018, we retrospectively adopted accounting guidance that resulted in a change in classification
of distributions received from unconsolidated subsidiaries. Additional information regarding the impact of accounting guidance
adopted during the current period can be found in Note 1 to the Notes to Consolidated Financial Statements.
53
The principal components of our operating cash flows are the excess of premiums collected and net investment income
received 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 increase in operating cash flows in 2018 as compared to 2017 of $3.9 million was primarily due to an increase in
premium receipts of $60.8 million, a decrease in 2018 estimated tax payments as compared to 2017 of $11.5 million and a
decrease in cash paid for operating expenses of $1.6 million, partially offset by an increase in paid losses of $64.3 million and a
decrease in cash received from investment income of $5.1 million. The increase in premium receipts was driven by our
Specialty P&C segment, primarily due to premiums received from a loss portfolio transfer entered into during the second
quarter of 2018 and, to a lesser extent, our Workers' Compensation Insurance segment, primarily due to premiums received
related to the third quarter 2017 acquisition of the Great Falls book of business. The decrease in 2018 estimated tax payments
was primarily due to the lower statutory federal income tax rate in 2018 as compared to 2017. The increase in paid losses was
driven by all of our operating segments, particularly in our Specialty P&C segment, primarily due to the timing of loss
payments between periods, and our Lloyd's Syndicates segment, primarily due to 2017 storm-related losses which were paid in
the current year. The decrease in cash paid for operating expenses was primarily due to a decrease in compensation related
costs, largely offset by an increase in cash paid for operating expenses in our Lloyd's Syndicates segment primarily due to the
start-up of Syndicate 6131. The decrease in cash received from investment income was primarily due to a reduction in interest
received on our fixed maturities portfolio resulting from lower average balances.
The decrease in operating cash flows in 2017 as compared to 2016 of $5.6 million 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 the increase in our weighted average outstanding debt in 2017. These decreases in operating cash flows were
largely offset by an increase in premium receipts of $16.1 million, driven by our Workers' Compensation Insurance segment, a
decrease in loss payments of $11.9 million, driven by our Specialty P&C segment and an increase in cash received from
investment income of $10.8 million primarily due to distributions from unconsolidated subsidiaries.
The increase in operating cash flows in 2016 as compared to 2015 of $39.8 million 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. The increase in operating cash flows was partially offset by a decrease in cash received from investment
income of $33.0 million primarily due to a reduction in interest received on our fixed maturities portfolio resulting from lower
average balances.
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 and borrowings and repayments under our
Revolving Credit Agreement. 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
54
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.
55
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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.
In 2017, we became concerned again around potential higher severity trends in HCPL business and began to reflect
this concern in our case reserve estimates for both 2017 and 2018. This concern was also reflected in more
conservative estimates of ultimate losses for open claims for earlier accident years. Furthermore, we are responding to
these initial loss indications by seeking rate increases where we believe appropriate and maintaining our underwriting
discipline.
57
Activity in our net reserve for losses during 2018, 2017 and 2016 is summarized below:
Balance, beginning of year
(In thousands)
2018
2,048,381
$
2017
2016
$
1,993,428
$
2,005,326
Less reinsurance recoverables on unpaid losses and
loss adjustment expenses
Net balance, beginning of year
335,585
1,712,796
273,475
1,719,953
249,350
1,755,976
Year Ended December 31
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
685,326
603,518
587,007
(92,116)
593,210
(117,268)
(412,711)
(529,979)
1,776,027
(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
343,820
2,119,847
$
335,585
2,048,381
$
273,475
1,993,428
$
At December 31, 2018 our gross reserve for losses included case reserves of approximately $1.4 billion and IBNR
reserves of approximately $0.7 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 Insurance 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 our
Specialty P&C and Workers' Compensation Insurance 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.
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 offer alternative market solutions whereby we cede certain premiums from our Workers' Compensation Insurance and
Specialty P&C segments to either the SPCs at Eastern Re or Inova Re, our Cayman Islands reinsurance subsidiaries which are
reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, unaffiliated captive insurers. During
2018 and 2017, we wrote total alternative market premium of approximately $89.6 million and $84.5 million, respectively. The
majority of these policies ($85.1 million and $77.7 million in 2018 and 2017, respectively) are reinsured to the SPCs at Eastern
Re or Inova Re, net of a ceding commission. Each SPC at Eastern Re and Inova Re is owned, fully or in part, by an agency,
group or association and the operating results of the SPCs are due to the participants of that cell. We participate to a varying
degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest is as low as 25% and
as high as 85%. SPC operating results due to external cell participants are reflected as a SPC dividend expense in our
Segregated Portfolio Cell Reinsurance segment. See further discussion on our SPC operations in the Segment Operating
Results - Segregated Portfolio Cell Reinsurance section that follows. The alternative market workers' compensation policies are
ceded from our Workers' Compensation Insurance segment to the SPCs under 100% quota share reinsurance agreements. The
58
alternative market professional liability policies are ceded from our Specialty P&C segment 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 $4.5 million and
$6.8 million in 2018 and 2017, respectively, is 100% ceded to unaffiliated captive insurers.
Prior to January 1, 2018, Syndicate 1729 served as a reinsurer on a quota share basis for a wholly owned insurance
subsidiary in our Specialty P&C segment. Syndicate 1729 did not renew the quota share agreement with our Specialty P&C
segment on January 1, 2018.
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, 2018, 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 $36 million or more.
Excess of Loss Reinsurance Agreements
We generally reinsure risks under treaties (our excess of loss reinsurance agreements) 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 agreements 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 healthcare professional liability and medical technology
liability treaties which renewed October 1, 2018 and January 1, 2019, respectively. Our workers' compensation treaty renewed
May 1, 2018 at a higher rate than the previous agreement. The significant coverages provided by our current excess of loss
reinsurance agreements are detailed in the following table.
Excess of Loss Reinsurance Agreements
Healthcare
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.
59
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.
Other Reinsurance Arrangements
For the workers' compensation business ceded to Eastern Re and Inova 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)
(1) Prior to May 1, 2018, ProAssurance assumed 100% of aggregate losses in excess of an
aggregate attachment point with a maximum loss limit of $100K. Effective May 1,
2018, ProAssurance no longer participates in the aggregate reinsurance coverage.
(2) The attachment point is based on a percentage of written premium (average is 89%)
and varies by cell.
Each SPC has participants and the profit or loss of each cell accrues fully to these cell participants. We participate in
certain SPCs and as of December 31, 2018, our ownership interest in the SPCs in which we participate is as low as 25% and as
high as 85%. Each SPC maintains a loss fund initially equal to the difference between premium assumed by the cell and the
ceding commission. The external participants 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 participants.
Within our Lloyd's Syndicates 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.
60
• 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.
• External excess of loss reinsurance is utilized by Syndicate 1729 to manage the net loss exposure on the specialty
property and contingency coverages ceded to Syndicate 6131 (see further discussion in Segment Operating Results
- Lloyd’s Syndicates 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.
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, 2018
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. As a result of the TCJA that was
signed into law at the end of 2017, the corporate tax rate effective for the 2018 tax year is 21% as compared to 35% for the
2017 tax year. The lower corporate tax rate had no material effect on our liquidity for the year ended December 31, 2018.
61
Investing Activities and Related Cash Flows
Our investments at December 31, 2018 and December 31, 2017 are comprised as follows:
($ in thousands)
Fixed maturities, available for sale:
December 31, 2018
December 31, 2017
Carrying
Value
% of Total
Investment
Carrying
Value
% of Total
Investment
U.S. Treasury obligations
$
120,201
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other asset-backed securities
Total fixed maturities, available for sale
Fixed maturities, trading
Total fixed maturities
Equity investments
Short-term investments
BOLI
Investment in unconsolidated subsidiaries
Other investments
Total investments
35,354
293,772
1,223,475
181,238
44,101
195,657
2,093,798
38,188
2,131,986
442,937
308,319
64,096
367,757
34,287
$ 3,349,382
4% $
1%
133,627
20,956
9%
632,243
37% 1,167,158
5%
197,844
1%
26,703
6%
101,711
63% 2,280,242
1%
—
64% 2,280,242
13%
9%
1%
11%
2%
470,609
432,126
62,113
330,591
110,847
100% $ 3,686,528
4%
1%
17%
31%
5%
1%
3%
62%
—%
62%
13%
12%
1%
9%
3%
100%
The distribution of our investments in available-for-sale fixed-maturity securities by rating were as follows:
($ in thousands)
December 31, 2018
December 31, 2017
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
$
645,300
101,328
120,801
155,352
190,595
311,036
146,721
133,199
118,864
50,466
100,447
19,689
$ 2,093,798
31% $
5%
6%
7%
9%
15%
7%
6%
6%
2%
5%
617,091
183,221
173,488
195,110
210,263
296,852
202,581
103,023
100,025
48,207
119,310
1%
31,071
100% $ 2,280,242
27%
8%
8%
9%
9%
13%
9%
4%
4%
2%
6%
1%
100%
*Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright ©2018, S&P Global Market
Intelligence
62
A detailed listing of our investment holdings as of December 31, 2018 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
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 $30 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 15,
2019, $250 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 our Revolving Credit Agreement is detailed in
Note 10 of the Notes to Consolidated Financial Statements.
As discussed 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, 2018, securities on deposit
with Lloyd's included fixed maturities having a fair value of $123.4 million and short-term investments with a fair value of
$19.3 million.
Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately
94% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average
effective duration of our fixed maturity securities at December 31, 2018 was 2.99 years; the weighted average effective
duration of our fixed maturity securities combined with our short-term securities was 2.60 years.
The carrying value and unfunded commitments for certain of our investments were as follows:
($ in thousands, except expected funding period)
December 31, 2018 December 31, 2017
Unfunded
Commitment
Expected funding
period in years
Carrying Value
December 31, 2018
Qualified affordable housing project tax credit
partnerships (1)
Historic tax credit partnerships (2)
All other investments, primarily investment fund
LPs/LLCs
Total
$
$
65,677 $
3,757
298,323
367,757 $
84,607
6,118
294,924
385,649
$
$
960
276
221,612
222,848
6
1
5
(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, 2018, we had investments in 34 separate
investment funds with a total carrying value, as shown in the table above, which represented approximately 9% 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, 2018, 2017 or 2016.
In the fourth quarter of 2017, we provided 100% of the capital for the newly formed SPA, Syndicate 6131, which began
writing business effective January 1, 2018. The capital for Syndicate 6131 was provided through an increase in our FAL
securities, which at December 31, 2018 had a fair value of approximately $142.7 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
2019 of up to $200 million, referred to as FAL. The Board, through a non-binding resolution, extended this commitment
through 2022. See further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows.
63
Financing Activities and Related Cash Flows
Treasury Shares
Treasury share activity for 2018, 2017 and 2016 was as follows:
(In thousands)
2018
2017
2016
Treasury shares at the beginning of the period
Shares reacquired, at cost of $2 million for 2016
Shares reissued, primarily those reissued pursuant to the ProAssurance 2011
Employee Stock Ownership Plan, had a fair value of approximately $1 million in
2018 and approximately $2 million in both 2017 and 2016
Treasury shares at the end of the period
9,368
—
(16)
9,352
9,409
—
(41)
9,368
9,403
44
(38)
9,409
We did not repurchase any common shares subsequent to December 31, 2018 and as of February 15, 2019 our remaining
Board authorization was approximately $110 million.
Shareholder Dividends
Our Board declared cash dividends during 2018, 2017 and 2016 as follows:
Quarterly Cash Dividends Declared, per Share
2018
2017
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fourth Quarter - Special dividend
$
$
$
$
$
0.31
0.31
0.31
0.31
0.50
$
$
$
$
$
0.31
0.31
0.31
0.31
4.69
$
$
$
$
$
0.31
0.31
0.31
0.31
4.69
Each dividend was paid in the month following the quarter in which it was declared. Cash dividends totaling $316
million, $315 million and $119 million were paid during the years ended December 31, 2018, 2017 and 2016, 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, 2018, 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. At December 31, 2018, there were no outstanding
borrowings on our Revolving Credit Agreement and we are in compliance with the financial covenants of the Revolving Credit
Agreement, which expires in June 2020.
During 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
accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on a quarterly basis. At December 31,
2018, the outstanding balance of the Mortgage Loans was approximately $39 million and we are in compliance with the
financial covenant of the Mortgage Loans, which mature in December 2027.
Additional information regarding our debt is provided in Note 10 of the Notes to Consolidated Financial Statements.
During 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 2.35%. Additional information on our interest rate cap agreement is
provided in Note 11 of the Notes to Consolidated Financial Statements.
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
64
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 that have or are reasonably likely to have a material
current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources. See more information on our off-balance sheet arrangements in Note 9 of the
Notes to Consolidated Financial Statements.
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, 2018 was as follows:
(In thousands)
Losses and loss adjustment expenses
Debt obligations including interest and fees
Operating lease obligations
Funding commitments primarily related to non-
public investment entities
Total
Payments due by period
Total
$ 2,119,847
366,010
27,124
231,942
$ 2,744,923
Less than
1 year
580,902
19,640
4,829
107,585
712,956
$
$
1-3 years
3-5 years
$
$
815,498
32,684
7,577
87,914
943,673
$
$
381,397
60,678
4,506
36,325
482,906
$
$
More than
5 years
342,050
253,008
10,212
118
605,388
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.
At December 31, 2018, there were no outstanding borrowings on our Revolving Credit Agreement; however, the above
table includes unused commitment fees associated with our Revolving Credit Agreement as we presume the full unused facility
will remain available through expiration of the agreement in June 2020. Additionally, we presume the current interest rate on
our Mortgage Loans at December 31, 2018 will remain constant until maturity of the Mortgage Loans. For more information
regarding these agreements see Note 10 of the Notes to Consolidated Financial Statements.
Our operating lease obligations are primarily for the rental of office space and, to a lesser extent, office equipment. Our
funding commitments are primarily related to non-public investment entities but also include the unused commitment under our
Syndicate Credit Agreement as we presume it will be fully advanced within the next year for purposes of the disclosure in the
table above. For more information regarding these agreements see Note 9 of the Notes to Consolidated Financial Statements.
The above table excludes our remaining capital commitment to support our underwriting capacity in our Lloyd's
Syndicates through 2019 of up to $200 million, referred to as FAL. The Board, through a non-binding resolution, extended this
commitment through 2022. In order to satisfy the FAL requirement, we transfer funds from our Corporate segment to our
Lloyd's Syndicates segment which are used to invest in securities that are placed on deposit with Lloyd's. See further discussion
of the securities on deposit with Lloyd's in Note 3 of the Notes to Consolidated Financial Statements. In addition, the table
above excludes a short-term loan commitment where we have agreed to advance funds on a 30 day basis. See more information
regarding this agreement in Note 9 of the Notes to Consolidated Financial Statements.
65
Results of Operations - Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Selected consolidated financial data for each period is summarized in the table below.
($ in thousands, except per share data)
2018
2017
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
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
$ 834,914
$ 818,853
$
$
100,832
(43,488)
9,833
886,030
593,210
238,556
9,122
16,117
857,005
764,018
738,531
103,695
16,409
7,514
866,149
469,158
235,753
15,771
16,844
737,526
$
$
70,896
80,322
(2,863)
(59,897)
2,319
19,881
124,052
2,803
(6,649)
(727)
119,479
29,025
128,623
(99,598)
(18,032)
21,359
(39,391)
$
$
$
$
$
$
47,057
79,527
0.88
0.88
1.48
1.48
$
$
$
$
$
$
72.4 %
29.1 %
101.5 %
90.3 %
(62.1%)
3.0 %
107,264
$ (60,207)
108,538
$ (29,011)
2.01
2.00
2.03
2.02
63.5%
31.9%
95.4%
82.4%
16.6%
6.3%
$
$
$
$
(1.13)
(1.12)
(0.55)
(0.54)
8.9 pts
(2.8) pts
6.1 pts
7.9 pts
(78.7) pts
(3.3) pts
In all tables that follow, the abbreviation "nm" indicates that the information or the percentage change is not meaningful.
66
Executive Summary of Operations
As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third
quarter of 2018 to include a new segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance
segment reflects the operating results (underwriting profit or loss, plus investment results) of SPCs which assume workers
‘compensation, healthcare professional liability or a combination of the two from our Workers' Compensation Insurance and
Specialty P&C segments. The underwriting results of the SPCs that assume workers’ compensation business and healthcare
professional liability business were previously reported in our Workers’ Compensation and Specialty P&C segments,
respectively, and the results of investment assets solely allocated to SPC operations were previously reported in our Corporate
segment, are now reported in the Segregated Portfolio Cell Reinsurance segment. The Workers' Compensation segment has also
been renamed "Workers' Compensation Insurance." All prior period segment information has been recast to conform to the
current period presentation and the segment reorganization had no impact on previously reported consolidated financial results.
See further information regarding the segment reorganization in Note 16 of the Notes to Consolidated Financial Statements.
The following sections provide an overview of our consolidated and segment results of operations for the year ended
December 31, 2018 as compared to 2017. See the Segment Operating Results sections that follow for additional information
regarding each segment's operating results.
Revenues
The following table shows our consolidated and segment net premiums earned:
($ in thousands)
2018
2017
Change
Year Ended December 31
Net Premiums Earned
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Consolidated total
$ 491,787
186,079
73,940
67,047
$ 818,853
$ 449,823
163,309
68,197
57,202
$ 738,531
$
$
41,964
22,770
5,743
9,845
80,322
9.3%
13.9%
8.4%
17.2%
10.9%
All of our operating segments contributed to the increase in net premiums earned during the year ended December 31,
2018 as compared to 2017. The largest component of the increase in consolidated net premiums earned during 2018 was $26.6
million of premium written and fully earned from a loss portfolio transfer entered into during the second quarter of 2018 in our
Specialty P&C segment (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that
follows). The increase in net premiums earned in our Workers' Compensation Insurance segment primarily reflected the late
2017 acquisition of the Great Falls book of business (see further discussion in our Segment Operating Results - Workers'
Compensation Insurance section that follows).
The following table shows our consolidated net investment result:
Net investment income
($ in thousands)
2018
$ 91,884
2017
$ 95,662
Equity in earnings (loss) of unconsolidated subsidiaries
8,948
8,033
Net investment result
$ 100,832
$ 103,695
Change
$ (3,778)
915
$ (2,863)
(3.9%)
11.4%
(2.8%)
Year Ended December 31
The decrease in our consolidated net investment result in 2018 as compared to 2017 was primarily attributable to a
decrease in net investment income primarily due to reduced earnings from our fixed income portfolio which reflected lower
average investment balances. The decrease in equity in earnings (loss) of unconsolidated subsidiaries was primarily due to
lower reported earnings from a few LP investments and increases in the amortization on our tax credit partnerships. In addition,
equity in earnings (loss) of unconsolidated subsidiaries reflected the impact of the adoption of an accounting standard during
the first quarter of 2018 around the recognition and measurement of financial assets and financial liabilities (see Note 1 of the
Notes to Consolidated Financial Statements for additional detail regarding accounting changes adopted during the period).
67
The following table shows our total consolidated net realized investment gains (losses):
($ in thousands)
2018
2017
Change
Year Ended December 31
Net impairment losses recognized in earnings
Other net realized investment gains (losses)
Net realized investment gains (losses)
$
(490) $ (12,952) $ 12,462
(72,359)
29,361
$ (59,897)
$ (43,488) $ 16,409
(42,998)
96.2%
(246.4%)
(365.0%)
During 2018, we recognized OTTI in earnings of $0.5 million related to debt instruments from two issuers in the energy
sector. During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early
stage business investment. Other net realized investment losses during 2018 was driven by changes in the fair value of our
equity trading portfolio, partially offset by gains realized on the sale of certain equity securities. See further discussion in our
Segment Operating Results - Corporate section that follows.
Expenses
The following table shows our consolidated and segment net loss ratios and net loss development:
($ in millions)
2018
2017
Change
Year Ended December 31
Current accident year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Calendar year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
83.7%
93.8%
68.0%
64.5%
74.0%
72.4%
78.2%
63.7%
52.4%
76.9%
81.7%
89.9%
66.1%
67.4%
78.7%
63.5%
63.4%
62.6%
54.9%
77.3%
2.0 pts
3.9 pts
1.9 pts
(2.9) pts
(4.7) pts
8.9 pts
14.8 pts
1.1 pts
(2.5) pts
(0.4) pts
Favorable (unfavorable) net loss development, prior
accident years
Consolidated
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
$
$
$
$
$
92.1
77.0
8.1
9.0
(2.0)
$ 134.4
$ 119.4
5.7
$
$
$
8.5
0.8
$
$
$
$
$
(42.3)
(42.4)
2.4
0.5
(2.8)
The increase in our consolidated current accident year net loss ratio for the year ended December 31, 2018 as compared to
2017 was primarily due to a higher current accident year net loss ratio in our Specialty P&C segment. The higher current
accident year net loss ratio in our Specialty P&C segment was driven by an increase in expected losses in our excess and
surplus lines business and, to a lesser extent, the decrease to net premiums earned as a result of an increase in our estimate of
premiums owed to reinsurers for expected recoveries on prior year ceded losses. Additionally, the higher current accident year
net loss ratio in our Specialty P&C segment reflected the effect of a loss portfolio transfer (net premiums earned at a 95% loss
ratio) entered into during the second quarter of 2018 (see further discussion in our Segment Operating Results - Specialty
Property & Casualty section that follows). Partially offsetting the increase in the consolidated current accident year net loss
ratio in 2018 was a decrease in the current accident year net loss ratio in our Lloyd's Syndicates segment driven by higher net
premiums earned, partially offset by an increase in net losses incurred related to natural catastrophes and large property losses
as compared to 2017, including the impact of estimated losses recognized in connection with Hurricane Michael (see further
discussion in our Segment Operating Results - Lloyd's Syndicates section that follows).
68
In both 2018 and 2017, 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 Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Corporate*
Year Ended December 31
2018
2017
Change
29.1%
22.9%
29.9%
30.3%
47.3%
2.3%
31.9%
24.0%
32.2%
30.4%
47.1%
4.0%
(2.8) pts
(1.1) pts
(2.3) pts
(0.1) pts
0.2 pts
(1.7) 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).
Our consolidated underwriting expense ratio decreased for the year ended December 31, 2018 as compared to 2017
driven by an increase in net premiums earned across all of our operating segments and, to a lesser extent, a decrease in
operating expenses in our Corporate segment, primarily driven by a decrease in share-based compensation expenses and other
compensation related costs. In addition, the decrease reflected a loss portfolio transfer (net premiums earned with minimal
associated operating expenses) entered into during the second quarter of 2018 in our Specialty P&C segment, which accounted
for 1.0 percentage point of the decrease in our consolidated underwriting expense ratio (see further discussion in our Segment
Operating Results - Specialty Property & Casualty section that follows). The decrease in our consolidated underwriting expense
ratio for 2018 was partially offset by an increase in consolidated DPAC amortization, primarily in our Specialty P&C segment
due to an increase in commission and brokerage expenses, and an increase in operating expenses in our Lloyd's Syndicates
segment, primarily due to the establishment of Syndicate 6131.
Taxes
Our effective tax rates for the years ended December 31, 2018 and 2017 were a benefit of 62.1% and an expense of
16.6%, respectively. The largest drivers of the change in the effective tax rate between 2018 and 2017 were the lower statutory
federal income tax rate in 2018 as compared to 2017 used to develop the effective tax rate due to the TCJA and the impact of
tax credits on the effective tax rate due to lower pre-tax income in 2018 as compared to 2017.
Our effective tax rates for the years ended December 31, 2018 and 2017 were different from the statutory federal income
tax rates in effect for each year primarily due to the utilization of tax credits transferred to us from our tax credit partnership
investments and a portion of our investment income being tax-exempt. See further discussion, including notable items during
2018 and 2017 in the Segment Operating Results - Corporate section that follows under the heading "Taxes."
Operating Ratio
Our operating ratio is our combined ratio, less our investment income ratio. This ratio is the effect of underwriting
profitability and investment income. Our operating ratio for the years ended December 31, 2018 and 2017 was as follows:
Year Ended December 31
2018
2017
Change
Operating ratio
90.3%
82.4%
7.9 pts
The increase in 2018 primarily reflected a higher consolidated net loss ratio driven by our Specialty P&C segment
primarily due to a lower amount of prior year favorable development and a lower investment income ratio driven by a decline
in income from our fixed maturity securities due to lower average investment balances. The lower investment income ratio also
reflected the decrease to net investment income due to the adoption of an accounting standard during the first quarter of 2018
around the recognition and measurement of financial assets and financial liabilities (see previous discussion under the heading
"Revenues"). The increase was partially offset by a lower expense ratio in our Corporate segment primarily driven by a
decrease in share-based compensation expenses and other compensation related costs.
69
ROE
ROE is calculated as net income 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. ROE for the years ended December 31, 2018
and 2017 was as follows:
ROE
Year Ended December 31
2018
2017
3.0%
6.3%
Change
(3.3) pts
The decrease in our ROE in 2018 was primarily due to the decrease in net income, partially offset by a lower average
equity base as compared to 2017. The decrease in net income was driven by the change in the fair value of our equity trading
portfolio and a lower amount of prior year favorable development in our Specialty P&C segment. The lower average equity
base was primarily due to cumulative dividend declarations since the 2017 in excess of net income and, to a lesser extent, lower
AOCI primarily resulting from changes in unrealized gains and losses in our fixed maturity available-for-sale securities.
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, 2018 as compared to December 31, 2017 is shown in the following table.
Book Value Per Share at December 31, 2017
Increase (decrease) to book value per share during the year ended
Book Value Per
Share
$
29.83
December 31, 2018 attributable to:
Dividends declared
Net income
OCI
Other *
Book Value Per Share at December 31, 2018
$
(1.74)
0.88
(0.66)
0.08
28.39
* Includes the impact of cumulative effect adjustments related to ASUs adopted during 2018.
70
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:
Net realized investment (gains) losses
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 (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
Year Ended December 31
2018
2017
$
47,057
$
107,264
43,488
(2,535)
148
41,101
(8,631)
32,470
79,527
(16,409)
3,083
(157)
(13,483)
4,719
(8,764)
98,500
—
6,541
—
79,527
0.88
0.60
1.48
$
$
$
3,497
108,538
2.00
0.02
2.02
$
$
$
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell
Reinsurance segment and the portion of SPC operating earnings, including the gain or loss, net of our participation, is due to
the external cell participants through the 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 the SPC dividend expense (income) which is due to the external cell participants.
(2) The annual expected incremental tax rate for 2018 is 21% as compared to 35% for 2017, associated with the taxable or tax
deductible items listed above. Excluding certain discrete items, which are tax effected at the annual expected incremental tax
rate in the period they are included in net income, our 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 made a reasonable estimate of the effects on our
deferred tax asset balances at December 31, 2017 as it related to the limitation on the future deductibility on certain executive
compensation and recorded a provisional charge to income tax expense of $3.5 million for the year ended December 31,
2017. During 2018, we were able to complete our accounting for the impact of the TCJA on our December 31, 2017 deferred
tax asset balances related to executive compensation; no measurement period adjustment was recorded in 2018 as a result
(see further discussion in Note 6 of the Notes to Consolidated Financial Statements).
71
Segment Operating Results - Specialty Property & Casualty
As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third
quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting
results of the SPCs that assume healthcare professional liability business were previously reported in our Specialty P&C
segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. All prior period segment information has
been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the
Notes to Consolidated Financial Statements.
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance.
Segment operating results reflected pre-tax underwriting profit or loss from these insurance lines, exclusive of investment
results, which are included in our Corporate segment. Segment operating results included the following:
($ 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
2018
$ 494,148
2017
$ 466,621
$ 491,787
$ 449,823
5,844
(384,431)
5,688
(285,250)
$
$
Change
27,527
5.9%
41,964
156
(99,181)
9.3%
2.7%
34.8%
(112,419)
(107,972)
(4,447)
4.1%
—
781
$
(5,181)
57,108
5,181
$ (56,327)
(100.0%)
(98.6%)
$
Net loss ratio
Underwriting expense ratio
78.2%
22.9%
63.4%
24.0%
14.8 pts
(1.1) pts
In the second quarter of 2018, we entered into a loss portfolio transfer with a large healthcare organization. Per the
agreement, we will cover a specific inventory of existing claims as well as provide tail coverage. As the contract included both
prospective (tail) coverage and retroactive coverage, we bifurcated the provisions of the contract and accounted for each
component separately. As of the effective date, we recognized total net premiums written and earned of $26.6 million,
comprised of $7.9 million of prospective coverage and $18.7 million of retroactive coverage, and total net losses and loss
adjustment expenses of $25.4 million within our Specialty P&C segment for the year ended December 31, 2018. See further
discussion in Note 4 of the Notes to Consolidated Financial Statements.
Premiums Written
Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of
new business, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by
rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written
through multi-period policies. In addition, premium volume may periodically be affected by shifts in the timing of renewals
between periods. The healthcare professional liability market, which accounts for a majority of the revenues in this segment,
remains challenging as physicians continue joining hospitals or larger group practices and are thus no longer purchasing
individual or group policies in the standard market. In addition, some competitors have chosen to compete primarily on price;
both factors may impact our ability to write new business and retain existing business.
Gross, ceded and net premiums written were as follows:
($ in thousands)
Gross premiums written
Less: Ceded premiums written
Net premiums written
2018
$ 577,196
83,048
$ 494,148
Year Ended December 31
2017
Change
$ 549,323
82,702
$ 466,621
$
$
27,873
346
27,527
5.1%
0.4%
5.9%
72
Gross Premiums Written
Gross premiums written by component were as follows:
($ in thousands)
2018
2017
Change
Year Ended December 31
Professional liability
Physicians (1)(8)
Twelve month term
Twenty-four month term
Total Physicians
Healthcare facilities (2)(8)
Other healthcare providers (3)
Legal professionals (4)
Tail coverages (5)(6)
Retroactive coverages (6)
Total professional liability
Medical technology liability (7)
Other
Total
$ 352,279
$ 360,232
$
22,171
374,450
65,014
32,200
26,227
25,579
18,708
542,178
34,528
490
$ 577,196
27,370
387,602
47,697
32,599
25,628
21,206
—
514,732
34,164
427
$ 549,323
$
(7,953)
(5,199)
(13,152)
17,317
(399)
599
4,373
18,708
27,446
364
63
27,873
(2.2%)
(19.0%)
(3.4%)
36.3%
(1.2%)
2.3%
20.6%
nm
5.3%
1.1%
14.8%
5.1%
(1) Physician policies were our greatest source of premium revenues in both 2018 and 2017. The decrease in twelve month
term policies in 2018 was due to timing differences of $10.9 million primarily related to the shifting in 2018 renewal
dates of a few large policies that were renewed in the first quarter of 2019. Excluding the effect of these timing
differences, twelve month term policies increased $2.9 million as compared to 2017. This increase was primarily due to
new business written, an increase in premiums assumed in which we participate on a quota share basis and an increase in
renewal pricing, largely offset by retention losses during the period. Renewal pricing increases in 2018 is reflective of our
concern about potential increases in loss severity as well as more moderate marketplace price competition. Twelve month
term premium in 2018 also reflected an increase in coverage from one insured who acquired an entity that was not
previously insured by us. We also offer twenty-four month term policies to our physician insureds in one selected
jurisdiction. The decrease in twenty-four month term policies in 2018 as compared to 2017 primarily reflected the normal
cycle of renewals (policies subject to renewal in 2018 were previously written in 2016 rather than in 2017).
(2) Our healthcare facilities premium (which includes hospitals, surgery centers and other similar facilities) increased in 2018
as compared to 2017 driven by new business written, primarily due to the addition of two large policies in 2018, and, to a
lesser extent, an increase in coverage pertaining to one large entity which consolidated certain policies that were not
previously insured by us. Additionally, given the loss environment and initial loss indications we are seeing in the
healthcare facilities space, we are seeking rate increases where we believe appropriate. These increases were partially
offset by retention losses during the period.
(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 2018 as compared to 2017 was primarily due to new business written and, to a lesser extent, an increase in the rate
charged for certain renewed policies in select states due to rate filings, largely offset by retention losses.
(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 significantly from period to period. The increase in tail premiums in 2018 was driven by $7.9 million of tail
coverage provided in connection with a loss portfolio transfer with a large healthcare organization entered into during the
second quarter of 2018 (see further discussion in footnote 6 that follows), partially offset by the effect of tail coverage
purchased in 2017 for a few large claims-made policies in one jurisdiction that were rewritten to occurrence coverage.
These policies are a part of one of our shared risk arrangements and therefore, a large portion of the premium written was
also ceded during 2017 (see further discussion in the Ceded Premiums Written section that follows).
(6) We offer custom alternative risk solutions including loss portfolio transfers for large healthcare entities who, most
commonly, are exiting a line of business, changing an insurance approach, or simply preferring to transfer risk. In the
second quarter of 2018, we entered into a loss portfolio transfer with a large healthcare organization. Per the agreement,
we will cover a specific inventory of existing claims as well as provide tail coverage. The premiums received for the
73
coverage provided for the existing inventory of claims was classified as retroactive coverage and resulted in $18.7 million
of one-time premium written and fully earned during 2018. The premiums received for the prospective (tail) coverage
resulted in $7.9 million of one-time premium written and fully earned during 2018. See Note 4 of the Notes to
Consolidated Financial Statements for further information on this transaction.
(7) Our medical technology liability business is marketed throughout the U.S.; coverage is offered on a primary basis, within
specified limits, to manufacturers and distributors of medical technology and life sciences products including entities
conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our medical
technology liability premium volume is impacted by the sales volume of insureds. The slight increase in 2018 was
primarily due to new business written and, to a lesser extent, an increase in the premium charged for certain renewed
policies as a result of an increase in the sales volume of the insureds, partially offset by retention losses. Retention losses
in 2018 are largely attributable to an increase in competition on terms and pricing.
(8) Certain components of our gross premiums written include alternative market premiums. We cede either all or a portion
of the alternative market premium, net of reinsurance, to certain SPCs of our wholly owned Cayman Islands reinsurance
subsidiaries, Eastern Re and Inova Re, which are reported in our Segregated Portfolio Cell Reinsurance segment (see
further discussion in the Ceded Premiums Written section that follows). The portion not ceded to the SPCs is retained
within our Specialty P&C segment. Alternative market gross premiums written by component were as follows:
Year Ended December 31
($ in millions)
2018
2017
Change
Physicians
Healthcare facilities
Total
$
$
1.4
4.4
5.8
$
$
1.2
3.1
4.3
$
$
0.2
1.3
1.5
16.7%
41.9%
34.9%
The increase in our alternative market healthcare facilities premium during 2018 was primarily due to new business
written and, to a lesser extent, an increase in renewal pricing primarily due to increases in exposure related to a few
policies, partially offset by retention losses.
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
2018
2017
$
$
19.8
19.8
2.5
2.8
3.0
47.9
$
$
31.6
5.8
2.1
3.6
5.4
48.5
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:
Physicians*
Healthcare facilities*
Other healthcare providers*
Legal professionals
Medical technology liability
Year Ended December 31
2018
2017
90%
87%
87%
86%
87%
90%
86%
85%
84%
87%
* Excludes certain policies written on an excess and surplus lines basis.
74
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. Our pricing continues to be based on expected losses, as indicated by our historical
loss data and available industry loss data. In recent years, this practice has resulted in gradual rate increases and we anticipate
further rate increases due to indications of increasing loss severity. Additionally, 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.
Changes in renewal pricing by component was as follows:
Physicians (1)(2)
Healthcare facilities (1)(2)
Other healthcare providers (1)
Legal professionals (2)
Medical technology liability
Year Ended
December 31
2018
3%
7%
4%
5%
3%
(1) Excludes certain policies written on an excess and surplus lines basis.
(2) See Gross Premiums Written section for further explanation of renewal pricing 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 healthcare professional liability coverages, we also retain from 3% - 12.5% of the
next $25 million of risk for coverages in excess of $1 million. 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)
Premium ceded to SPCs (4)
Other ceded premiums written
Adjustment to premiums owed under reinsurance agreements, prior
accident years, net (5)
Total ceded premiums written
$
2018
35,591
2,105
31,358
5,159
3,310
5,525
Year Ended December 31
$
2017
31,853
13,983
30,780
3,914
3,361
Change
$
3,738
(11,878)
578
1,245
(51)
11.7%
(84.9%)
1.9%
31.8%
(1.5%)
$
83,048
$
(1,189)
82,702
6,714
(564.7%)
$
346
0.4%
(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 in 2018
primarily reflected an increase in the premiums we expect to owe our reinsurers based upon increases to our
estimates of losses recoverable from our reinsurance partners.
(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 Syndicates segment on a quarter delay, except when information is available that is
material to the current period. We also recorded the cession to Syndicate 1729 from our Specialty P&C segment on a
quarter delay as the amounts were not material and that permitted the cession to be reported by both our Lloyd's
Syndicates segment and our Specialty P&C segment in the same reporting period. The decrease in premiums ceded to
Syndicate 1729 during 2018 primarily reflected the non-renewal of our quota share agreement with Syndicate 1729
on January 1, 2018; the impact of which was not reflected in ceded premiums written until the second quarter of 2018
75
due to the quarter delay. Additionally, the decrease in premiums ceded to Syndicate 1729 during 2018 reflected the
revised contract terms on our previous quota share agreement effective January 1, 2017 which reduced the premiums
ceded by essentially half. See the Segment Operating Results - Lloyd's Syndicates section 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 2018 and 2017, 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. 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 2018 was primarily
driven by growth in our Ascension Health and CAPAssurance programs, largely offset by the effect of a few large tail
endorsements that were written, and substantially ceded, during 2017 related to one of these shared risk
arrangements, as previously discussed under the heading "Gross Premiums Written."
(4) As previously discussed, as a part of our alternative market solutions, all or a portion of certain healthcare premium
written is ceded to the SPCs in our Segregated Portfolio Cell Reinsurance segment under either excess of loss or
quota share reinsurance agreements, depending on the structure of the individual program. See the Segment
Operating Results - Segregated Portfolio Cell Reinsurance section for further discussion on the cession to the SPCs
from our Specialty P&C segment. The increase in premiums ceded to the SPCs during 2018 was primarily driven by
new business written (see discussion in footnote 8 under the heading "Gross Premiums Written").
(5) 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. For 2018, we increased our estimate of expected losses and associated recoveries for
prior year ceded losses, as well as our estimate of ceded premiums owed to reinsurers. The increase in our estimate of
ceded premiums owed to reinsurers during 2018 as compared to 2017 was due to an increase in the number of claims
that exceeded our individual risk retention levels under certain loss-sensitive treaties. We believe that this increase in
claim severity is reflective of the evolving loss trends within the industry. For 2017, 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.
Ceded Premiums Ratio
As shown in the table below, our ceded premiums ratio was affected in both 2018 and 2017 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
2018
2017
Change
14.4%
15.1%
(0.7) pts
1.0%
13.4%
(0.2%)
15.3%
1.2 pts
(1.9) pts
The decrease in the current accident year ceded premiums ratio for the year ended December 31, 2018 was primarily due
to the decrease in premiums ceded to Syndicate 1729 and the effect of the loss portfolio transfer entered into during the second
quarter of 2018 (increase in gross premiums written with no premium ceded), partially offset by an increase in premiums ceded
under our excess of loss reinsurance arrangements. See discussion above under the heading "Ceded Premiums Written."
76
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. 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. Retroactive coverage premiums are 100%
earned at the inception of the contract, as all of the underlying loss events occurred in the past. 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.
Net premiums earned were as follows:
Year Ended December 31
($ in thousands)
Gross premiums earned
2018
$ 580,022
2017
$ 537,583
Less: Ceded premiums earned
88,235
87,760
Net premiums earned
$ 491,787
$ 449,823
Change
$
$
42,439
475
41,964
7.9%
0.5%
9.3%
The increase in gross premiums earned in 2018 was driven by the effect of the loss portfolio transfer entered into during
the second quarter of 2018 which resulted in $26.6 million of one-time premium written and fully earned in the current period
(see discussion under the heading "Gross Premiums Written"). The increase also included the pro rata effect of higher
premiums written during the preceding twelve months, predominantly in our healthcare facilities and physicians lines of
business, partially offset by the effect of a few large tail policies written and earned during 2017.
The slight increase in ceded premiums earned during 2018 was driven by the increase in our estimate of ceded premiums
owed to reinsurers for expected recoveries on prior year ceded losses in 2018 as compared to a decrease in our estimate in 2017
and, to a lesser extent, an increase in premium ceded under our excess of loss reinsurance arrangements. These increases in
ceded premiums earned were offset by the decrease in premiums ceded to Syndicate 1729 during the preceding twelve months
(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 the majority 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. For retroactive coverages, the insured event becomes a liability at inception of the underlying contract.
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.
77
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 were as follows:
Net Loss Ratios (1)
Year Ended December 31
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)
2017
2018
78.2%
(15.6%)
(26.5%)
93.8 % 89.9 %
63.4%
Change
14.8 pts
10.9 pts
3.9 pts
1.0%
(0.2%)
1.2 pts
Current accident year net loss ratio, excluding the effect of prior
year ceded premium (3)
92.8 % 90.1 %
2.7 pts
(1) Net losses, as specified, divided by net premiums earned.
(2) During 2018, we increased the premiums owed under reinsurance agreements for prior accident years which decreased
net premiums earned (the denominator of the current accident year ratio). During 2017, reductions to premiums owed
under reinsurance agreements for prior accident years increased net premiums earned. 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, excluding the effect of prior year ceded premium adjustments, increased 2.7
percentage points as compared to 2017 driven by our consideration of potential higher severity trends associated with
our excess and surplus lines business, which accounted for approximately 2.0 percentage points of the increase. The
remaining increase in the current accident year net loss ratio was primarily due our continued concern around potential
loss trends in the broader HCPL industry including large, more complex risks. The increase in the current accident
year net loss ratio was partially offset by a decrease to our reserves related to DDR coverage endorsements as
compared to an increase in 2017. In addition, the current accident year net loss ratio for 2018 also reflected the effect
of a loss portfolio transfer (net premiums earned at a 95% loss ratio) entered into during the second quarter of 2018.
See discussion in the Premiums section for our Specialty P&C segment under the heading "Gross Premiums Written"
for additional information on the loss portfolio transfer.
We recognized net favorable loss development related to our previously established reserve of $77.0 million and $119.4
million for the years ended December 31, 2018 and 2017, respectively. The net favorable loss development in 2018 and 2017
included $13.3 million and $10.1 million, respectively, attributable to our medical technology liability line of business and
$10.9 million and $5.2 million, respectively, attributable to our legal professionals liability line of business. We re-evaluate our
previously established reserve each quarter based on our most recently available claims data and currently available industry
trend information. Development recognized during 2018 principally related to accident years 2011 through 2014. Development
recognized during 2017 principally related to accident years 2010 through 2014.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting
Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our
reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are
reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions
can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2018
and 2017.
78
Underwriting, Policy Acquisition and Operating Expenses
Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31,
2018 and 2017 were comprised as follows:
($ in thousands)
DPAC amortization
Management fees
$
2018
52,253
6,968
Other underwriting and operating expenses
Total
53,198
$ 112,419
53,741
$ 107,972
Year Ended December 31
2017
Change
$
47,611
$ 4,642
6,620
348
(543)
$ 4,447
9.7%
5.3%
(1.0%)
4.1%
DPAC amortization increased during the year ended December 31, 2018 as compared to 2017 driven by an increase in
commission and brokerage expenses due to the increase in written and assumed premium during 2018 and a decrease in ceding
commission income, which is an offset to expense, due to the reduction in premiums ceded to Syndicate 1729.
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 gross premium written by the subsidiary. While the terms of the management agreement were
consistent between 2018 and 2017, fluctuations in the amount of gross premium written by each subsidiary can result in
corresponding variations in the management fee charged to each subsidiary during a particular period. The management fees
charged to the Specialty P&C segment during 2018 primarily reflected the increase in gross premiums written due to a loss
portfolio transfer entered into during the second quarter of 2018 (see discussion under the heading "Gross Premiums Written").
Other underwriting and operating expenses decreased slightly during the year ended December 31, 2018 as compared to
2017. Other underwriting and operating expenses in 2018 included $1.0 million associated with a data analytics services
agreement entered into during the fourth quarter of 2018 (see Note 9 of the Notes to Consolidated Financial Statements for
further information), which was more than offset by slight decreases in other expense categories as compared to 2017, none of
which were individually significant.
Underwriting Expense Ratio (the Expense Ratio)
Our expense ratio for the Specialty P&C segment for the year ended December 31, 2018 as compared to 2017, was as
follows:
Underwriting expense ratio
Year Ended December 31
2017
2018
22.9% 24.0%
Change
(1.1) pts
The decrease in the underwriting expense ratio for 2018 was primarily due to the impact of the loss portfolio transfer
entered into during the second quarter of 2018 (net premiums earned with minimal associated operating expenses), which
accounted for 1.2 percentage points of decrease in the underwriting expense ratio (see further discussion under the heading
"Gross Premiums Written"). After removing the impact of the loss portfolio transfer, the underwriting expense ratio for 2018
remained relatively flat as compared to 2017.
Segregated Portfolio Cell Dividend Expense (Income)
In the third quarter of 2018, we reorganized our segment reporting which resulted in the creation of a new segment:
Segregated Portfolio Cell Reinsurance (see further discussion under the heading "ProAssurance Overview"). The Segregated
Portfolio Cell Reinsurance segment provides the results of SPCs at our Eastern Re and Inova Re subsidiaries, including SPCs
that assume healthcare professional liability business which were previously reported within our Specialty P&C segment. As
such, there is no longer a SPC dividend expense reported in the Specialty P&C segment associated with these SPCs. See more
information on our Cayman Islands SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance
section that follows.
The SPC dividend expense for the year ended December 31, 2017 represented a one-time $5.2 million pre-tax expense
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, 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 declined as the HCPL insurance market has softened. The SPC dividend expense attributable to those cells was
unrelated to our Cayman Islands captive operations.
79
Segment Operating Results - Workers' Compensation Insurance
As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third
quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting
results of the SPCs at Eastern Re and Inova Re that assume workers' compensation business were previously reported in our
Workers' Compensation segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. The traditional
workers' compensation business remains in the Workers' Compensation segment which has been renamed to "Workers'
Compensation Insurance." All prior period segment information has been recast to conform to the current period presentation.
See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.
Our Workers' Compensation Insurance segment provides workers' compensation products to employers generally with
1,000 or fewer employees. Workers' compensation products offered include guaranteed cost policies, policyholder dividend
policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market products include
program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management
services. Alternative market premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance
segment or, to a limited extent, unaffiliated captive insurers. Our Workers' Compensation Insurance segment operating results
reflected pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which
are included in our Corporate segment. Segment operating results included the following:
Net premiums written
($ in thousands)
Net premiums earned
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Segment operating results
Net loss ratio
Underwriting expense ratio
Premiums Written
Year Ended December 31
2018
$ 195,350
2017
$ 173,566
$ 186,079
2,412
(118,483)
(55,693)
14,315
$
$ 163,309
2,096
(102,233)
(52,576)
10,596
$
$
$
$
Change
21,784
12.6%
22,770
316
(16,250)
(3,117)
3,719
13.9%
15.1%
15.9%
5.9%
35.1%
63.7%
29.9%
62.6%
32.2%
1.1 pts
(2.3) pts
Our workers’ compensation premium volume is driven by five primary factors: (1) the amount of new business written,
(2) audit premium, (3) retention of our existing book of business, (4) premium rates charged on our renewal book of business
and (5) changes in payroll exposure.
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
2018
293,230
97,880
195,350
$
$
2017
264,048
90,482
173,566
$
$
Change
$
$
29,182
7,398
21,784
11.1%
8.2%
12.6%
80
Gross Premiums Written
Gross premiums written by product were as follows:
($ in thousands)
2018
2017
Change
Year Ended December 31
Traditional business:
Guaranteed cost
$
163,138
$
143,141
$
19,997
Policyholder dividend
21,203
20,388
Deductible
Retrospective
Other
Alternative market business
Total
8,143
6,911
9,413
84,422
293,230
$
8,362
3,428
8,185
80,544
$
264,048
$
29,182
815
(219)
3,483
1,228
3,878
14.0%
4.0%
(2.6%)
101.6%
15.0%
4.8%
11.1%
Gross premiums written in our traditional business increased during the year ended December 31, 2018 as compared to
2017, which primarily reflected new business written, including $11.7 million of new business premium related to the third
quarter 2017 acquisition of the Great Falls book of business, an improvement in renewal pricing and an increase in audit
premium. The growth in our alternative market business for the year ended December 31, 2018 primarily reflected new
business written and an improvement in renewal pricing. We retained 22 of the 23 available alternative market programs up for
renewal for the year ended December 31, 2018, including 6 programs available for renewal during the fourth quarter of 2018.
New business, audit premium, retention and renewal price changes for both the traditional business and the alternative
market business are shown in the table below:
($ in millions)
$
New business
Audit premium (including EBUB) $
Retention rate (1)
Change in renewal pricing (2)
Traditional
Business
43.2
4.3
84%
(1%)
Year Ended December 31
2018
$
$
Alternative
Market
Business
8.3
1.6
91%
—%
$
$
Segment
Results
51.5
5.9
86%
(1%)
2017
Alternative
Market
Business
Segment
Results
Traditional
Business
$
$
$
$
37.8
2.7
85%
(3%)
$
$
9.9
1.4
92%
(4%)
47.7
4.1
87%
(3%)
(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.
81
Ceded Premiums Written
Ceded premiums written were as follows:
($ in thousands)
Premiums ceded to SPCs
Premiums ceded to external reinsurers
Premiums ceded to unaffiliated captive insurers
Change in return premium estimate under
external reinsurance
Total ceded premiums written
2018
$ 79,927
13,515
4,495
Year Ended December 31
2017
Change
$ 73,761
$
6,166
9,823
6,784
3,692
(2,289)
8.4%
37.6%
(33.7%)
(57)
$ 97,880
114
$ 90,482
$
(171)
7,398
(150.0%)
8.2%
Our Workers' Compensation Insurance segment cedes alternative market business under a 100% quota share reinsurance
agreement, net of a ceding commission, to SPCs in our Segregated Portfolio Cell Reinsurance segment. The ceding commission
consists of an amount for fronting fees, cell rental fees, commissions, premium taxes, claims administration fees and risk
management fees. The fronting fees, commissions, premium taxes and risk management fees are recorded as an offset to
underwriting, policy acquisition and operating expenses (see discussion that follows under the heading "Underwriting, Policy
Acquisition and Operating Expenses"). Cell rental fees are recorded as a component of other income and claims administration
fees are recorded as ceded ULAE. The increase in premiums ceded to SPCs in 2018 primarily reflected growth in our
alternative market premium, as previously discussed, as well as the designed consolidation of certain unaffiliated captive
insurers into SPCs at Inova Re (see discussion below).
Under our external reinsurance agreement, we retain the first $0.5 million in risk insured by us and cede losses in excess
of this amount up to $119.5 million on each loss occurrence under our primary external reinsurance contract. Per our
reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis. The increase in
premiums ceded to external reinsurers during the year ended December 31, 2018 was driven by an increase in earned premium,
an increase in reinsurance rates effective May 1, 2018 and a decrease in revenue sharing with our reinsurance broker, primarily
due to a change in estimate during the second quarter of 2017.
The decrease in premiums ceded to unaffiliated captive insurers during the year ended December 31, 2018 primarily
reflected the impact of the 2017 designed consolidation of two unaffiliated captive programs. During 2017, we added one new
SPC at Inova Re that writes business previously ceded to two non-renewed unaffiliated captive programs. The premium now
written through this new SPC is reflected in premiums ceded to SPCs in the table above. During the fourth quarter of 2018, one
of the two remaining unaffiliated captive programs was also moved to Inova Re.
Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended
December 31, 2018 and 2017. The increase in the return premium estimate for the year ended December 31, 2018 primarily
reflected favorable loss experience in prior contract years.
Ceded Premiums Ratio
The ceded premiums ratio was as follows:
Ceded premiums ratio, as reported
Less the effect of:
Premiums ceded to SPCs (100%)
Premiums ceded to unaffiliated captive insurers (100%)
Return premium estimated under external reinsurance
Assumed premiums earned (not ceded to external reinsurers)
Ceded premiums ratio, less the effects of above
Year Ended December 31
2018
34.2%
2017
35.7%
Change
(1.5) pts
25.1%
2.4%
—%
(0.3%)
7.0%
25.9%
4.1%
(0.1%)
(0.3%)
6.1%
(0.8) pts
(1.7) pts
0.1 pts
— pts
0.9 pts
The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede
premiums related to our traditional business to external reinsurers on an earned premium basis. The increase in the ceded
premiums ratio for the year ended December 31, 2018 when compared to 2017 primarily reflected an increase in reinsurance
rates and the impact of broker revenue sharing, as previously discussed.
82
Net Premiums Earned
Net premiums earned were as follows:
($ in thousands)
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
Year Ended December 31
2018
282,974
96,895
186,079
$
$
2017
253,944
90,635
163,309
$
$
Change
$
$
29,030
6,260
22,770
11.4%
6.9%
13.9%
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to SPCs in our
Segregated Portfolio Cell Reinsurance segment, external reinsurers or unaffiliated captive insurers. 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 during the years ended December 31, 2018 or 2017. The increase in net premiums earned primarily reflected
the pro rata effect of higher net premiums written during the preceding twelve months.
Losses and Loss Adjustment Expenses
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. 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:
Calendar year net loss ratio
Less impact of prior accident years on the net loss ratio
Current accident year net loss ratio
Year Ended December 31
2018
63.7%
(4.3%)
68.0%
2017
Change
62.6%
(3.5%)
66.1%
1.1 pts
(0.8) pts
1.9 pts
The current accident year net loss ratio for the year ended December 31, 2018 was 68.0% as compared to 66.1% for 2017.
The increase in the current accident year net loss ratio reflected an increase in claim trends in 2018, including the impact of
severity-related claim activity related to economic growth trends and the increase in new and less experienced workers to the
workforce.
Current accident year incurred losses (excluding IBNR) ceded to our external reinsurers totaled $12.6 million for the year
ended December 31, 2018 compared to $9.8 million for 2017. The increase in ceded incurred losses for the year ended
December 31, 2018 primarily reflected the aforementioned increase in severity-related claim activity.
We recognized net favorable prior year development related to our previously established reserve of $8.0 million for the
year ended December 31, 2018 as compared to $5.7 million for 2017. The net favorable prior year development for the year
ended December 31, 2018 reflected overall favorable trends in claim closing patterns, primarily in the 2015 and 2016 accident
years. For each of the years ended December 31, 2018 and 2017, the net favorable prior year development included $1.6
million related to the amortization of the purchase accounting fair value adjustment.
83
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses includes the amortization of commissions, premium taxes and
underwriting salaries, which are capitalized and deferred over the related workers’ compensation policy period, net of ceding
commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our contract
acquisition efforts. These expenses also include a management fee charged by the Corporate segment, which represents
intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily related to the
acquisition of Eastern by ProAssurance. The management fee is based on the extent to which services are provided to the
subsidiary and the amount of gross premium written by the subsidiary.
Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised
as follows:
($ in thousands)
2018
2017
Change
Year Ended December 31
DPAC amortization
Management fees
Other underwriting and operating expenses
SPC ceding commission offset
$
33,352
$
31,433
$
1,919
2,193
37,407
(17,259)
1,975
36,791
(17,623)
52,576
$
218
616
364
3,117
6.1%
11.0%
1.7%
(2.1%)
5.9%
Total
$
55,693
$
The increase in DPAC amortization for the year ended December 31, 2018 as compared to 2017 primarily reflected the
increase in net premiums earned. The increase in other underwriting and operating expenses for the year ended December 31,
2018 as compared to 2017 primarily reflected an increase in expenses associated with the start-up of our New England region
through the Great Falls acquisition and an increase in compensation related costs.
As previously discussed, alternative market premiums written through our Workers' Compensation Insurance segment's
alternative market business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell
Reinsurance segment or, to a limited extent, unaffiliated captive insurers. SPC ceding commission income includes fronting
fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy
acquisition and operating expenses. The increase in SPC ceding commissions earned in 2018 as compared to 2017 was due to
growth in the alternative market business over the preceding twelve months.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Underwriting expense ratio, as reported
Less estimated ratio increase (decrease) attributable to:
Impact of ceding commissions received from SPCs
Amortization of intangible assets
Management fees
Impact of audit premium
Underwriting expense ratio, less listed effects
Year Ended December 31
2018
29.9%
2017
32.2%
Change
(2.3) pts
2.9%
1.3%
0.8%
(0.4%)
25.3%
3.4%
1.2%
0.8%
(0.3%)
27.1%
(0.5) pts
0.1 pts
— pts
(0.1) pts
(1.8) pts
The decrease in the expense ratio for the year ended December 31, 2018, exclusive of the items noted in the table,
primarily reflected the increase in net premiums earned. There were no other individually significant variances by expense
category that contributed to the remaining decrease in the expense ratio.
84
Segment Operating Results - Segregated Portfolio Cell Reinsurance
As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting during the
third quarter of 2018 which resulted in the creation of the Segregated Portfolio Cell Reinsurance segment. See further
information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.
The Segregated Portfolio Cell Reinsurance segment reflects the operating results (underwriting profit or loss, plus
investment results) of SPCs at Eastern Re and Inova Re, our Cayman Islands SPC operations. As of December 31, 2018, there
were 26 (22 active) SPCs. The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a
combination of the two from our Workers' Compensation Insurance and Specialty P&C segments. 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. Each SPC is owned, fully or in part, by an agency, group or association and the
operating results of the SPCs are due to the participants of that cell. We participate to a varying degree in the results of selected
SPCs and, for the SPCs in which we participate, our participation interest is as low as 25% and as high as 85%. SPC operating
results due to external cell participants are reflected as a SPC dividend expense in our Segregated Portfolio Cell Reinsurance
segment. In addition, our Segregated Portfolio Cell Reinsurance segment includes the SPC investment results as the
investments are solely for the benefit of the cell participants and investment results due to external cell participants are reflected
in the SPC dividend expense.
Segment operating results reflects our share of the underwriting and investment results of the SPCs in which we
participate, and included the following:
($ in thousands)
2018
2017
Change
Year Ended December 31
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
SPC net operating results
SPC dividend (expense) income(1)
Segment operating results(2)
Net loss ratio
Underwriting expense ratio
$
$
75,547 $
68,862 $
6,685
9.7%
73,940 $
1,566
(3,149)
211
(38,726)
(22,426)
11,416
(9,122)
68,197 $
1,059
3,914
115
(37,455)
(20,764)
15,066
(10,590)
5,743
507
(7,063)
96
(1,271)
(1,662)
(3,650)
1,468
8.4%
47.9%
(180.5%)
83.5%
3.4%
8.0%
(24.2%)
(13.9%)
$
2,294 $
4,476 $
(2,182)
(48.7%)
52.4%
30.3%
54.9%
30.4%
(2.5) pts
(0.1) pts
(1) Represents the operating (profit) loss due to external cell participants.
(2) Represents our share of the operating profit (loss) of the SPCs in which we participate.
In 2018, we restructured our Cayman Islands SPC operations. Effective January 1, 2018, all new and renewing alternative
market business previously ceded to the SPCs at Eastern Re, with the exception of one program, is now ceded to SPCs operated
by a newly formed wholly owned Cayman Islands subsidiary, Inova Re. As part of the restructuring, all SPCs previously
operated by Eastern Re, with the exception of one program, ceased assuming new and renewing business on or after January 1,
2018. The external cell participants' cumulative undistributed earnings and the results of all SPCs for the current period due to
external cell participants continue to be reported as SPC dividends payable and SPC dividend expense, respectively.
85
Premiums Written
Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% assumed from either our Workers'
Compensation Insurance or Specialty P&C segments. Premium volume is driven by five primary factors: (1) the amount of new
business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and,
for workers' compensation business, (4) audit premium and (5) changes in payroll exposure.
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
2018
$ 85,086
9,539
2017
$ 77,675
8,813
$ 75,547
$ 68,862
Change
$
$
7,411
726
6,685
9.5%
8.2%
9.7%
Gross Premiums Written
Gross premiums written reflected reinsurance premiums assumed by component as follows:
($ in thousands)
Workers' compensation
Healthcare professional liability
Gross Premiums Written
Year Ended December 31
2018
$ 79,927
5,159
$ 85,086
2017
$ 73,761
3,914
$ 77,675
Change
$
$
6,166
1,245
7,411
8.4%
31.8%
9.5%
Gross premiums written for the years ended December 31, 2018 and 2017 was primarily comprised of workers'
compensation coverages assumed from our Workers' Compensation Insurance segment. Gross premiums written increased
during 2018 as compared to 2017, driven by new business written and an improvement in renewal pricing. We retained 22 of
the 23 available alternative market programs up for renewal for the year ended December 31, 2018. In addition, we added a
new program at Inova Re during the fourth quarter of 2018 related to the designed consolidation of an unaffiliated captive
insurer (see further discussion in our Segment Operating Results - Workers' Compensation Insurance section).
New business, audit premium, retention and renewal price changes for the assumed workers' compensation premium is
shown in the table below:
($ in millions)
New business
Audit premium (including EBUB)
Retention rate (1)
Change in renewal pricing (2)
Year Ended December 31
2018
2017
$
$
$
$
8.3
1.6
91%
—%
9.9
1.4
92%
(4%)
(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.
86
Ceded Premiums Written
Ceded premiums written were as follows:
($ in thousands)
Ceded premiums written
2018
9,539
$
Year Ended December 31
2017
Change
$
8,813
$
726
8.2%
For the workers' compensation business, each SPC has in place its own external reinsurance arrangements. The healthcare
professional liability business is assumed net of reinsurance from our Specialty P&C segment; therefore, there are no ceded
premiums related to the healthcare professional liability business reflected in the table above. The risk retention for each loss
occurrence ranges from $0.3 million to $0.35 million based on the program, with limits up to $119.7 million. In addition, each
program has aggregate reinsurance coverage between $1.1 million and $2.1 million on a program year basis. Per the SPC
external reinsurance agreements, premiums are ceded on a written premium basis and the slight increase in premiums ceded to
external reinsurers for the year ended December 31, 2018 primarily reflected an increase in written premium. External
reinsurance rates vary based on the alternative market program.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Ceded premiums ratio
11.9%
11.9%
— pts
Year Ended December 31
2018
2017
Change
The above table reflects ceded premiums as a percent of gross premiums written for the workers' compensation business
only; healthcare professional liability business is assumed net of reinsurance, as discussed above. The ceded premiums ratio
remained unchanged for the year ended December 31, 2018 as compared to 2017.
Net Premiums Earned
Gross, ceded and net premiums earned were as follows:
($ in thousands)
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
Year Ended December 31
2018
83,264
9,324
73,940
$
$
2017
76,911
8,714
68,197
$
$
Change
$
$
6,353
610
5,743
8.3%
7.0%
8.4%
Net premiums earned consist of gross premiums earned less the portion of earned premiums that the SPCs cede to
external reinsurers. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums
earned tend to lag those of premiums written. Policies ceded to the SPCs are twelve month term 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
workers' compensation 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. The increase in net premiums earned primarily reflected
the pro rata effect of higher net premiums written during the preceding twelve months.
Net Investment Income and Net Realized Investment Gains (Losses)
Net investment income for the years ended December 31, 2018 and 2017 was primarily attributable to interest earned on
available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. Net realized
investment losses for the years ended December 31, 2018 and 2017 primarily reflected changes in the value of the SPCs' equity
portfolio.
87
Losses and Loss Adjustment Expenses
The following table summarizes the 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 were 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 impact of audit premium related to workers'
compensation business
Current accident year net loss ratio, excluding the effect of
Year Ended December 31
2018
52.4%
(12.1%)
64.5%
2017
54.9%
(12.5%)
67.4%
Change
(2.5) pts
0.4 pts
(2.9) pts
(1.5%)
(1.4%)
(0.1) pts
audit premium
66.0%
68.8%
(2.8) pts
The current accident year net loss ratio reflected the aggregate loss ratio for all programs. Loss reserves are estimated for
each program on a quarterly basis. Due to the size 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 current accident year net loss ratio decreased as
compared to 2017 primarily due to a decrease in severity-related claims activity.
Current accident year incurred losses (excluding IBNR) ceded to our external reinsurers totaled $2.0 million and $3.2
million for the years ended December 31, 2018 and 2017, respectively.
We recognized net favorable prior year development of $9.0 million and $8.5 million for the years ended December 31,
2018 and 2017, respectively, which primarily reflected better than expected claim trends in the 2015, 2016 and 2017 accident
years. The improved claim trends reflected lower frequency and severity than anticipated at the time the reserves were
established.
Audit premium from workers' compensation insureds results in a decrease in the net loss ratio, whereas audit premium
returned to workers' compensation insureds results in an increase in the net loss ratio. We recognized audit premium of $1.6
million and $1.4 million for the years ended December 31, 2018 and 2017, respectively, the effect of which is reflected in the
previous table. We estimate our current accident year losses and loss adjustment expenses based on the underlying actuarial
methodologies without consideration of audit premium. As a result, we removed the effects of audit premium in the previous
table for purposes of evaluating the current accident year net loss ratio.
Underwriting, Policy Acquisition and Operating Expenses
Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were
comprised as follows:
($ in thousands)
DPAC amortization
Other underwriting and operating expenses
Total
Year Ended December 31
2018
21,039
1,387
22,426
$
$
$
$
2017
19,927
837
Change
$ 1,112
5.6%
550
65.7%
20,764
$ 1,662
8.0%
DPAC amortization primarily represented ceding commissions, which vary by program and are paid to our Workers'
Compensation Insurance and Specialty P&C segments for premiums assumed. Ceding commissions include an amount for
fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy
acquisition and operating expenses within our Workers' Compensation Insurance and Specialty P&C segments. In addition,
ceding commissions paid to our Workers' Compensation Insurance segment include cell rental fees which are recorded as other
income within our Workers' Compensation Insurance segment.
88
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Underwriting expense ratio, as reported
Less impact of audit premium on expense ratio
Underwriting expense ratio, excluding the effect
of audit premium
Year Ended December 31
2018
30.3%
(0.7%)
2017
30.4%
(0.6%)
Change
(0.1) pts
(0.1) pts
31.0%
31.0%
— pts
89
Segment Operating Results - Lloyd's Syndicates
Our Lloyd's Syndicates segment includes operating results from our participation in certain Syndicates at Lloyd's of
London. We have a total capital commitment to support our Lloyd's Syndicate operations through 2019 of up to $200 million,
referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022. For the 2018
underwriting year, our FAL was comprised of investment securities deposited with Lloyd's which at December 31, 2018 had a
fair value of approximately $142.7 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements. During
the fourth quarter of 2018, we increased our FAL securities in order to support Syndicate 1729's accumulated losses from prior
years, stemming primarily from property and natural catastrophe losses.
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 (see discussion that follows under the heading "Property and Natural Catastrophe
Losses"). 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.
Lloyd's Syndicate 1729. We are the majority capital provider to Syndicate 1729, which covers a range of property and
casualty insurance and reinsurance lines. For the 2018 underwriting year, we increased our participation in the operating results
of Syndicate 1729 from 58% to 62% which, due to the quarter delay, was not reflected in our Lloyd's Syndicates segment
results until the second quarter of 2018. 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 £132.0 million
for the 2018 underwriting year, of which £82.0 million ($104.6 million based on December 31, 2018 exchange rates) was our
allocated underwriting capacity. For the 2019 underwriting year, we slightly decreased our participation in the operating results
of Syndicate 1729 from 62% to 61% which, due to the quarter delay, will not be reflected in our Lloyd's Syndicates segment
results until the second quarter of 2019. Syndicate 1729's maximum underwriting capacity for the 2019 underwriting year is
£128 million (approximately $163.3 million at December 31, 2018), of which £78 million (approximately $99.5 million at
December 31, 2018) is our allocated underwriting capacity.
Lloyd's Syndicate 6131. Beginning in the second quarter of 2018, our Lloyd's Syndicates segment includes the operating
results of a SPA, Syndicate 6131, which began writing business effective January 1, 2018 and focuses on contingency and
specialty property business. 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 for the 2018 underwriting year Syndicate 6131
had a maximum underwriting capacity of £8.0 million ($10.2 million based on December 31, 2018 exchange rates). For the
2019 underwriting year, Syndicate 6131 has a maximum underwriting capacity of £12 million (approximately $15.3 million at
December 31, 2018).
In addition to the results of our participation in Lloyd's Syndicates, as discussed above, our Lloyd's Syndicates segment
also includes 100% of the operating results of our wholly owned subsidiaries that support our operations at Lloyd's. For the
years ended December 31, 2018 and 2017, the results of our Lloyd's Syndicates segment were as follows:
($ in thousands)
Gross premiums written
Ceded premiums written
Net premiums written
Net premiums earned
Net investment income
Net realized gains (losses)
Other income (loss)
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
$
$
$
$
$
$
2018
88,746
(18,877)
69,869
67,047
3,358
(460)
322
(51,570)
(31,686)
317
(12,672) $
$
2017
70,224
(15,255)
54,969
57,202
1,736
$
$
$
107
(1,476)
(44,220)
(26,963)
568
(13,046) $
Change
18,522
(3,622)
14,900
9,845
1,622
(567)
1,798
(7,350)
(4,723)
(251)
374
26.4%
23.7%
27.1%
17.2%
93.4%
(529.9%)
121.8%
16.6%
17.5%
(44.2%)
2.9%
76.9%
47.3%
77.3%
47.1%
(0.4) pts
0.2 pts
90
Property and Natural Catastrophe Losses
As previously mentioned, we normally report results from our involvement in Lloyd's Syndicates on a quarter delay;
however, during the fourth quarter of 2018, Syndicate 1729 reported loss estimates in connection with Hurricane Michael,
which affected the northwest portion of Florida during October 2018. We estimated our allocated share of the net pre-tax losses
in connection with Hurricane Michael to be approximately $6.8 million, net of reinsurance and reinstatement premiums. These
losses would normally be reported in the first quarter of 2019 due to the aforementioned quarter delay. However, due to the
availability and significance of these estimates, we have accelerated our reporting of these storm-related losses into the fourth
quarter of 2018, which is consistent with our policy of disclosing significant losses in the period in which they become known
to us.
Segment operating results for both of the years ended December 31, 2018 and 2017 also included our allocated share of
the estimates for losses in connection with other significant natural catastrophes that occurred during the past two years. These
estimates also included reinstatement premiums we expect to receive from insureds as well as pay reinsurers, both of which
were written and earned during the respective period. For the year ended December 31, 2018, we estimate our allocated share
of the net pre-tax losses associated with these natural catastrophe and property losses to be approximately $12.1 million, which
includes the estimated $6.8 million in losses in connection with Hurricane Michael, as discussed above. The remaining
estimated losses in 2018 were primarily in connection with lava damage caused by the volcanic eruptions in Hawaii and storm
damage related to Hurricane Florence, which affected several states along the Mid-Atlantic U.S. Estimated net pre-tax losses in
2018 were partially offset by subsequent adjustments of approximately $2.1 million related to prior year storm-related losses.
For the year ended December 31, 2017, our estimated allocated share of net pre-tax losses associated with natural catastrophe
and property losses was $7.1 million and was primarily in connection with Hurricanes Harvey, Irma and Maria, which affected
Texas, several states in the Southeastern U.S. and islands in the Caribbean.
The impact of these natural catastrophe and property losses on our Lloyd's Syndicates segment's operating results for the
years ended December 31, 2018 and 2017 was as follows:
Year Ended December 31
($ in thousands)
2018
2017
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, current year, before tax
Net adjustments to estimated losses, prior year
Segment operating results, before tax
$
$
$
$
913 $
(230)
683 $
234 $
(2,209)
(1,975) $
Change
679
1,979
2,658
683 $
(14,761)
1,952
(12,809)
(12,126)
2,116
(10,010) $
(1,975) $
(36,297)
31,198
(5,099)
(7,074)
—
(7,074) $
2,658
21,536
(29,246)
(7,710)
(5,052)
2,116
(2,936)
290.2%
(89.6%)
(134.6%)
(134.6%)
(59.3%)
(93.7%)
151.2%
71.4%
nm
41.5%
Gross Premiums Written
Changes in our premium volume within our Lloyd's Syndicates segment are driven by four primary factors: (1) the
amount of new business and the channels in which the business is written, (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.
Gross premiums written in 2018 consisted of property insurance coverages (41% of total gross premiums written),
casualty coverages (30%), catastrophe reinsurance coverages (21%), property reinsurance coverages (4%) and specialty
property coverages (4%). The increase in gross premiums written during 2018 as compared to 2017 was primarily driven by
our increased participation in the operating results of Syndicate 1729, our participation in the operating results of Syndicate
6131 and, to a lesser extent, the effect of reinstatement premiums received in 2018 of approximately $0.9 million as compared
to $0.2 million in 2017. The reinstatement premiums represented the additional premium payable to Syndicate 1729 to restore
coverage limits that were exhausted under certain excess of loss reinsurance treaties as a result of the previously discussed
natural catastrophe-related losses.
As discussed in our Specialty P&C segment operating results, prior to January 1, 2018 Syndicate 1729 served as a
reinsurer on a quota share basis for a wholly owned insurance subsidiary in our Specialty P&C segment. For premiums
assumed, we include in gross premiums written an estimate of all premiums to be earned over the entire period covered by the
91
reinsurance agreement, generally one year, in the quarter in which the reinsurance agreement becomes effective. Results from
this ceding arrangement are reported in our Specialty P&C segment on the same quarter delay in order to be consistent with our
Lloyd's Syndicates segment as the effect of doing so is not material. The quota share agreement with our Specialty P&C
segment effective January 1, 2017 reflected revised contract terms which reduced premiums assumed by Syndicate 1729 by
essentially half. Syndicate 1729 did not renew the quota share agreement with our Specialty P&C segment on January 1, 2018;
however, due to the previously discussed quarter delay, the impact began to be reflected in each segment's operating results in
second quarter of 2018.
The 2016 and 2015 calendar year quota share arrangements with our Specialty P&C segment were commuted in
December 2017 and 2016, respectively. Due to the quarter delay, the effect of the 2016 and 2015 commutation was reported in
both segments' results during the first quarters of 2018 and 2017, respectively, and is reflected in the Lloyd's Syndicates
segment results for the years ended December 31, 2018 and 2017, respectively. The commutations did not differ significantly
from previously recorded amounts.
Ceded Premiums Written
Syndicate 1729 utilizes reinsurance to provide the 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. Ceded premiums written
increased for the year ended December 31, 2018 primarily due to the increased utilization of reinsurance on new business
written directly by Syndicate 1729 to replace the business previously assumed through the quota share agreement with our
Specialty P&C segment. The increase in ceded premiums written was partially offset by a decrease in reinsurance reinstatement
premiums Syndicate 1729 expects to owe to reinsurers in connection to the previously mentioned natural catastrophe-related
losses. Reinsurance reinstatement premiums were approximately $0.2 million in 2018 as compared to $2.2 million in 2017.
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. Premiums written through open-market channels are generally earned pro rata
over the entire policy period, which is predominately twelve months, whereas premiums written through delegated
underwriting authority arrangements are earned over twenty-four months. Therefore, net premiums earned is affected by shifts
in the mix of policies written between the open-market and delegated underwriting authority arrangements. Additionally,
fluctuations in premiums earned tend to lag those of premiums written. 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.
The increase in net premiums earned for the year ended December 31, 2018 primarily reflected the pro rata effect of shifts
in the mix of premiums written during the preceding twelve months; a larger proportion of premiums were written through the
open-market, as compared to previous years, which are predominately earned over twelve months. The increase in gross
premiums earned in 2018 as compared to 2017 was partially offset by an increase in ceded premiums earned which reflected
the effect of higher ceded premiums written during the preceding twelve months primarily due to a revision in our reinsurance
agreements at the beginning of 2017 and, to a lesser extent, the effect of reinstatement premiums earned, net of reinsurance
reinstatement premiums recognized, in 2018 as compared to 2017 in connection with the natural catastrophe-related losses, as
previously discussed. Net premiums earned for the years ended December 31, 2018 and 2017 included premium assumed from
our Specialty P&C segment of approximately $5.0 million and $11.8 million, respectively.
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. Syndicate 6131,
which began writing business effective January 1, 2018, follows a process similar to Syndicate 1729 for the establishment of
initial reserves. We expect loss ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the book
begins to mature. We also expect loss ratios of Syndicate 6131 to fluctuate from quarter to quarter as Syndicate 6131 assumes
more business from Syndicate 1729. The loss ratios 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.
92
The following table summarizes calendar year net loss ratios by separating losses between the current accident year and
all prior accident years. Net loss ratios for the period were as follows:
Calendar year net loss ratio
Less impact of prior accident years on the net loss ratio
Current accident year net loss ratio
Year Ended December 31
2018
76.9%
2.9%
74.0%
2017
77.3%
(1.4%)
78.7%
Change
(0.4) pts
4.3 pts
(4.7) pts
The decrease in the current accident year net loss ratio was driven by the effect of higher net premiums earned, excluding
reinstatement premiums recognized, and, to a lesser extent, lower non-catastrophe related current accident year losses. Partially
offsetting this decrease was the net effect of natural catastrophes in 2018 as compared to 2017. While gross losses incurred
related to natural catastrophes was lower in 2018, a larger portion of natural catastrophe-related losses in 2017 exceeded the
reinsurance retention limits whereas Syndicate 1729 retained more of these losses in 2018 due to certain excess of loss
reinsurance agreement terms; this impact on the current accident year net loss ratio was partially offset by the change in
reinstatement premiums recognized in connection with these losses in 2018 as compared to 2017.
We recognized $2.0 million of unfavorable prior year development for the year ended December 31, 2018 as compared to
$0.8 million of favorable prior year development for the year ended December 31, 2017. The unfavorable prior year
development for the year ended December 31, 2018 was driven by higher than expected losses and development on certain
large claims which resulted in unfavorable development with respect to a previous year of account.
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses increased by $4.7 million for the year ended December 31, 2018
as compared to 2017 primarily due to the anticipated growth in Syndicate 1729 operations, an increase in various operational
expenses associated with establishing Syndicate 6131 and, to a lesser extent, an increase in DPAC amortization primarily due to
an increase in broker commissions.
The slight increase in the underwriting expense ratio for the year ended December 31, 2018 was primarily due to the
previously mentioned increase in operating expenses and broker commissions, partially offset by an increase in net premiums
earned, as previously discussed.
Investments
Net investment income for the years ended December 31, 2018 and 2017 was primarily attributable to interest earned on
our FAL investments, which primarily includes investment-grade corporate debt securities. In the fourth quarter of 2017,
Syndicate 1729 expanded its fixed maturities portfolio to include certain debt securities classified as trading securities.
Investment results associated with these fixed maturity trading securities are reported on the same quarter delay.
Taxes
Operating results of this segment are subject to U.K. income tax law.
93
Segment Operating Results - Corporate
As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third
quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The Segregated
Portfolio Cell Reinsurance segment includes the results of investment assets solely allocated to SPC operations at our Cayman
Islands reinsurance subsidiaries, Eastern Re and Inova Re, which were previously reported in our Corporate segment. All prior
period segment information has been recast to conform to the current period presentation. See further information regarding our
segments in Note 16 of the Notes to Consolidated Financial Statements.
Our Corporate segment includes our investment operations, other than those reported in our Segregated Portfolio Cell
Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. Our Corporate segment also includes
non-premium revenues generated outside of our insurance entities and corporate expenses. Segment operating results for our
Corporate segment were net earnings of $42.3 million and $48.1 million for the years ended December 31, 2018 and 2017,
respectively, and included the following:
Net investment income
($ in thousands)
Equity in earnings (loss) of unconsolidated subsidiaries
Net realized gains (losses)
Operating expense
Interest expense
Income tax expense (benefit)
Year Ended December 31
2018
86,960
$
2017
$
92,867
$
8,948
$
$ (39,879) $
18,767
$
$
$
16,163
$
$ (17,715) $
8,033
12,388
29,275
16,844
21,927
Change
$
(5,907)
$
915
$ (52,267)
$ (10,508)
(681)
$
$ (39,642)
(6.4%)
11.4%
(421.9%)
(35.9%)
(4.0%)
(180.8%)
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
Short-term investments, including Other
BOLI
Investment fees and expenses
Net investment income
Year Ended December 31
2018
64,523
21,418
5,351
1,983
(6,315)
86,960
$
$
2017
72,665
17,198
7,643
1,979
(6,618)
92,867
$
$
$
$
Change
(8,142)
4,220
(2,292)
4
303
(5,907)
(11.2%)
24.5%
(30.0%)
0.2%
(4.6%)
(6.4%)
Fixed Maturities
The decrease in our investment income from fixed maturity securities during 2018 was due to lower average fixed
maturity 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 16.0% lower
in 2018 as compared to 2017.
Average yields for our fixed maturity portfolio were as follows:
Average income yield
Average tax equivalent income yield
94
Year Ended December 31
2018
3.3%
3.4%
2017
3.1%
3.5%
Equities
Income from our equity portfolio increased during 2018 as compared to 2017 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
Short-term investments, which have a maturity at purchase of one year or less are carried at fair value, which
approximates their cost basis, and are primarily composed of investments in U.S. treasury obligations, commercial paper and
money market funds. Income from our short-term and other investments decreased for the year ended December 31, 2018 as
compared to 2017 primarily due to certain other investments which were affected by the adoption of an accounting standard
during the first quarter of 2018 around the recognition and measurement of financial assets and financial liabilities (see further
discussion in the Equity in Earnings (Loss) of Unconsolidated Subsidiaries section that follows).
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries was as follows:
($ in thousands)
All other investments, primarily investment fund LPs/LLCs
Tax credit partnerships
Equity in earnings (loss) of unconsolidated subsidiaries
2018
33,270
(24,322)
8,948
$
$
Year Ended December 31
2017
Change
$
$
28,685
(20,652)
8,033
$
$
4,585
(3,670)
915
16.0%
17.8%
11.4%
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. For our investments in LPs/LLCs, we record our allocable portion of the partnership operating income or loss as
the results of the LPs/LLCs become available. Our investment results from our portfolio of investments in LPs/LLCs decreased
for the year ended December 31, 2018 primarily due to lower reported earnings from a few LP investments. In addition, our
portfolio of investments in LPs/LLCs in 2018 were affected by the adoption of an accounting standard during the first quarter
of 2018 around the recognition and measurement of financial assets and financial liabilities (see Note 1 of the Notes to
Consolidated Financial Statements for additional detail regarding accounting changes adopted during the period). Under the
new accounting standard, LPs/LLCs previously reported using the cost method are now reported at fair value with changes in
fair value recognized in equity in earnings (loss) of unconsolidated subsidiaries.
Our tax credit partnership 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 partnerships and historic tax credit
partnerships. We account for our tax credit partnership 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 partnerships, 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 partnerships 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 $3.0 million for the year ended December 31, 2018, as compared to
$2.3 million for the same respective period in 2017. The results from our tax credit partnership investments for the year ended
December 31, 2018 reflected an increase in partnership operating losses as compared to the same respective period of 2017.
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above,
reduced our tax expenses in 2018 and 2017 as follows:
(In millions)
Tax credits recognized during the period
Tax benefit of tax credit partnership operating losses
Year Ended December 31
2018
2017
$
$
21.0
5.1
$
$
23.1
7.2
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 2018 was
primarily attributable to our qualified affordable housing project tax credit partnerships.
95
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 (collectively, 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 well as 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
2018
2017
$
$
86,960
$
92,867
8,948
8,033
95,908
$ 100,900
Pro forma tax-equivalent investment result
$ 125,533
$ 148,553
Reconciliation of pro forma and GAAP tax-equivalent
investment result:
GAAP net investment result
$
95,908
$ 100,900
Taxable equivalent adjustments, calculated using the 21% and
35% federal statutory tax rate for 2018 and 2017, respectively:
State and municipal bonds
BOLI
Dividends received
Tax credit partnerships
Pro forma tax-equivalent investment result
1,693
527
772
26,633
$ 125,533
9,103
1,065
1,930
35,555
$ 148,553
96
Net Realized Investment Gains (Losses)
The following table provides detailed information regarding our net realized investment gains (losses).
(In thousands)
Year Ended December 31
2018
2017
OTTI losses, total:
State and municipal bonds
Corporate debt
Investment in unconsolidated subsidiaries
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 fixed maturities
Gross realized (losses), available-for-sale fixed maturities
Net realized gains (losses), equity investments
Net realized gains (losses), other investments
Change in unrealized holding gains (losses), equity investments
Change in unrealized holding gains (losses), convertible securities, carried at fair
value as a part of other investments
Other
Net realized investment gains (losses)
$
— $
(490)
—
—
(490)
5,940
(5,715)
12,030
1,340
(49,398)
(3,849)
263
$ (39,879) $
(850)
(419)
(11,931)
248
(12,952)
6,622
(3,092)
10,109
2,963
7,837
896
5
12,388
During 2018, we recognized OTTI in earnings of $0.5 million related to debt instruments from two issuers in the energy
sector. We recognized $39.9 million of net realized investment losses during 2018, primarily driven by unrealized holding
losses on our equity trading portfolio of $49.4 million and, to a lesser extent, $3.8 million of unrealized holding losses on
convertible securities. The primary driver of these unrealized holding losses was market volatility throughout 2018, which
caused our equity securities to decline in value. The most significant sectors impacted were the financial and energy sectors,
although all sectors were impacted. The net realized investment losses recognized in 2018 were partially offset by realized
gains of $12.0 million on the sale of certain equity securities, primarily in the industrial sector.
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 in 2017 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 $0.2 million in OCI, both of which related to corporate bonds.
97
Operating Expenses
Corporate segment operating expenses were comprised as follows:
($ in thousands)
Operating expenses
Management fee offset
Segment Total
2018
34,437
(15,670)
18,767
$
$
Year Ended December 31
2017
Change
$
$
44,034
(14,759)
29,275
$
(9,597)
(911)
$ (10,508)
(21.8%)
6.2%
(35.9%)
The decrease in operating expenses during 2018 was primarily driven by a decrease in share-based compensation
expenses and other compensation related costs and, to a lesser extent, a decrease in professional fees. The decrease in share-
based compensation expense in 2018 was attributable to fewer awards outstanding and an adjustment of the projected award
value based upon the decline of one of the performance metrics associated with a particular year's award.
Operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance 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 gross 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 arrangement were
consistent between 2017 and 2018, fluctuations in the amount of gross premium written by each subsidiary can result in
corresponding variations in the management fee charged to each subsidiary during a particular period. The management fees
charged during 2018 primarily reflected the increase in gross premiums written in our Specialty P&C segment due to a loss
portfolio transfer entered into during 2018 (see further discussion in our Segment Operating Results - Specialty Property &
Casualty section).
Interest Expense
Consolidated interest expense for the years ended December 31, 2018 and 2017 was comprised as follows:
Year Ended December 31
($ in thousands)
Senior Notes due 2023
Revolving Credit Agreement (including fees and amortization)
Mortgage Loans (including amortization)
(Gain)/loss on interest rate cap
Other
Interest expense
2018
$ 13,429
1,388
1,425
(153)
28
$ 16,117
2017
$ 13,429
2,974
65
339
37
$ 16,844
$
$
Change
—
(1,586)
1,360
(492)
(9)
(727)
—%
(53.3%)
2,092.3%
(145.1%)
(24.3%)
(4.3%)
Consolidated interest expense decreased during 2018 as compared to 2017 driven primarily by a decrease in the weighted
average outstanding borrowings on our Revolving Credit Agreement and, to a lesser extent, the change in the fair value of our
interest rate cap, partially offset by interest expense incurred on our Mortgage Loans. The weighted average outstanding
borrowings on our Revolving Credit Agreement were $41 million for the year ended December 31, 2018 as compared to $169
million for the year ended December 31, 2017. The interest rate cap was entered into during the fourth quarter of 2017 and 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 10 and further discussion of our interest rate cap agreement in Note 11 of the Notes to
Consolidated Financial Statements.
98
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 and tax expense incurred from SPCs at Inova Re, one of our Cayman
Islands reinsurance subsidiaries, which intend to elect to be taxed as U.S. taxpayers. The U.K. tax expense incurred by the U.K.
based subsidiaries of our Lloyd's Syndicates segment is allocated to that segment. Consolidated tax expense reflects tax
expense of both segments, as shown in the table below:
(In thousands)
Year Ended
December 31
2018
2017
Corporate segment income tax expense (benefit)
Lloyd's Syndicates segment income tax expense (benefit)
$ (17,715) $
(317)
Consolidated income tax expense (benefit)
$ (18,032) $
21,927
(568)
21,359
Factors affecting our consolidated effective tax rate include the following:
Statutory rate (1)
Tax-exempt income (2)
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
Provision-to-return differences
Other
Effective tax rate
Year Ended December 31
2018
2017
21.0%
(8.6%)
(72.6%)
7.8%
(0.9%)
—%
—%
(8.0%)
(0.8%)
(62.1%)
35.0%
(6.5%)
(18.0%)
0.7%
(2.1%)
5.1%
2.7%
(1.5%)
1.2%
16.6%
(1) Effective January 1, 2018, the corporate statutory tax rate changed from 35% to 21% as a result of tax
reform enacted by the TCJA.
(2) Includes tax-exempt interest, dividends received deduction and change in cash surrender value of BOLI.
Our effective tax rate for 2018 and 2017 was a benefit of 62.1% and an expense of 16.6%, respectively, and differs from
the statutory federal income tax rate primarily due to the utilization of tax credits transferred to us from our tax credit
partnership investments and a portion of our investment income being tax-exempt. Tax credits utilized were $21.0 million for
2018 as compared to $23.1 million for 2017 while tax-exempt income was $2.5 million and $8.4 million in the same respective
years. The impact of tax credits and tax-exempt income on our effective tax rate was greater in 2018 due to lower pre-tax
income in 2018 as compared to 2017. 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. Additionally, our effective tax rate in 2018 was impacted by a tax benefit of 8.0% related to provision-to-return
differences. These differences primarily reflected the impact of the change in the federal corporate tax rate on our temporary
provision-to-return differences as well as higher tax credits received for the 2017 tax year than the previously estimated tax
benefit.
For 2017, the most significant item that decreased our effective tax rate, other than the previously mentioned tax credits
and tax-exempt investment income, 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 lowered the effective tax rate by 2.1%. Under the
revised guidance, the difference between the deduction for tax purposes, which is based upon the fair market value of share-
based awards and the time of vesting, and the compensation cost recognized for financial reporting purposes, which is based
upon the fair market value of the share-based awards 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 prior guidance.
The effective tax rate for 2017 also reflects the impact of the remeasurement of our deferred tax assets and liabilities at
December 31, 2017 and the impact of a change in the limitation of future deductibility of certain executive compensation as a
result of the enactment of the TCJA. As previously discussed, the TCJA was signed into law on December 22, 2017. Under
99
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 $3.5 million, which resulted in a
2.7% increase to our effective tax rate in 2017. During 2018, we were able to complete our accounting for the impact of the
TCJA on our December 31, 2017 deferred tax asset balances related to executive compensation; no measurement-period
adjustment was recorded in 2018 as a result (see further discussion in Note 6 of the Notes to Consolidated Financial
Statements). These one-time charges to income tax expense in 2017 as a result of the enactment of the TCJA did not reoccur in
2018.
100
Results of Operations - Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Selected consolidated financial data for each period is summarized in the table below.
($ 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
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
$ 764,018
$ 738,531
$ 738,533
$ 733,281
$
$
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
25,485
5,250
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
$ 108,538
$ 129,844
$
$
$
$
$
$
$
$
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%
$
$
$
$
$
$
(43,817)
(21,306)
(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, that abbreviation "nm" indicates that the information or the percentage change is not meaningful.
101
Executive Summary of Operations
As previously discussed under the heading "ProAssurance Overview," we reorganized our segment reporting in the third
quarter of 2018 to include a new segment: Segregated Portfolio Cell Reinsurance. All prior period segment information has
been recast to conform to the current period presentation and the segment reorganization had no impact on previously reported
consolidated financial results. See further information regarding the segment reorganization in Note 16 of the Notes to
Consolidated Financial Statements.
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
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicate
Consolidated total
$ 449,823
163,309
68,197
57,202
$ 738,531
$ 454,506
$
161,988
62,137
54,650
$ 733,281
$
(4,683)
1,321
6,060
2,552
5,250
(1.0%)
0.8%
9.8%
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 $11.8 million in premium earned in
2016 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). After
removing the impact of the prior year novation in the Specialty P&C segment, net premiums earned increased in all our
operating segments in 2017 as compared to 2016.
The following table shows our consolidated net investment result:
($ in thousands)
Net investment income
Equity in earnings (loss) of unconsolidated subsidiaries
Net investment result
2017
$ 95,662
8,033
$ 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)
2017
$ (12,952) $
29,361
2016
(9,766) $
44,641
Net realized investment gains (losses)
$
16,409
$
34,875
Change
(3,186)
(15,280)
$ (18,466)
32.6%
(34.2%)
(52.9%)
During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early
stage business investment. See further discussion in our Segment Operating Results - Corporate section that follows. Other net
realized investment gains during 2017 was primarily composed of changes in unrealized holding gains and net realized
investment gains related to our trading portfolio.
102
Expenses
The following table shows our consolidated and segment net loss ratios:
($ in millions)
2017
2016
Change
Year Ended December 31
Current accident year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicate
Calendar year net loss ratio
Consolidated ratio
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicate
Favorable (unfavorable) net loss development,
prior accident years
Consolidated
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicate
81.7%
89.9%
66.1%
67.4%
78.7%
63.5%
63.4%
62.6%
54.9%
77.3%
80.1%
88.7%
67.5%
64.1%
63.3%
60.4%
58.5%
66.5%
56.7%
62.4%
1.6 pts
1.2 pts
(1.4) pts
3.3 pts
15.4 pts
3.1 pts
4.9 pts
(3.9) pts
(1.8) pts
14.9 pts
$ 134.4
$ 119.4
5.7
$
8.5
$
0.8
$
$ 143.8
$ 137.2
1.6
$
4.6
$
0.5
$
(9.4)
$
$ (17.8)
4.1
$
3.9
$
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 Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicate
Corporate*
Year Ended December 31
2017
2016
Change
31.9%
24.0%
32.2%
30.4%
47.1%
4.0%
31.0%
22.8%
33.1%
30.5%
41.8%
4.2%
0.9 pts
1.2 pts
(0.9) pts
(0.1) 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
103
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.
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
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
Book Value Per
Share
$
33.78
December 31, 2017 attributable to:
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
104
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
108,538
2.00
0.02
2.02
$
$
$
2,049
153
(32,673)
11,436
(21,237)
129,844
—
—
129,844
2.83
(0.40)
2.43
$
$
$
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell
Reinsurance segment and the portion of operating earnings, including the gain or loss, net of our participation, is due to
the external cell participants through the 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 the SPC dividend expense (income) which is due to the external cell participants.
(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 $3.5
million for the year ended December 31, 2017. Any future guidance from the IRS addressing the effects of the TCJA on
executive compensation could result in a change to this provisional amount. See further discussion under the heading
"Deferred Taxes" in the Critical Accounting Estimates section.
105
Segment Operating Results - Specialty Property & Casualty
As previously discussed, we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation
of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting results of the SPCs that assume healthcare
professional liability business were previously reported in our Specialty P&C segment and are now reported in our Segregated
Portfolio Cell Reinsurance segment. All prior period segment information has been recast to conform to the current period
presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance.
Specialty P&C segment operating results reflect pre-tax underwriting profit or loss from these insurance lines, exclusive of
investment results, which are included in our Corporate segment. Segment operating results included the following:
($ 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
Net loss ratio
Underwriting expense ratio
Premiums Written
Year Ended December 31
$
$
$
$
$
$
2017
466,621
449,823
5,688
(285,250)
(107,972)
(5,181)
57,108
63.4%
24.0%
2016
454,718
454,506
5,306
(266,090)
(103,656)
—
90,066
58.5%
22.8%
$
$
$
Change
11,903
2.6%
(4,683)
382
(19,160)
(4,316)
(5,181)
(32,958)
(1.0%)
7.2%
7.2%
4.2%
nm
(36.6%)
4.9 pts
1.2 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
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
82,702
2016
$ 535,725
81,007
$ 466,621
$ 454,718
Change
$
$
13,598
1,695
11,903
2.5%
2.1%
2.6%
106
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
427
$ 549,323
21,869
366,019
59,361
33,353
25,351
18,092
502,176
33,067
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
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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.
(7) Certain components of our gross premiums written include alternative market premiums. We cede either all or a portion
of the alternative market premium, net of reinsurance, to certain SPCs of our wholly owned Cayman Islands
reinsurance subsidiary, Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance segment (see
further discussion in the Ceded Premiums Written section that follows). The portion not ceded to the SPCs is retained
within our Specialty P&C segment. Alternative market gross premiums written by component were as follows:
Year Ended December 31
($ in millions)
2017
2016
Physicians
Healthcare facilities
Total
$
$
1.2
3.1
4.3
$
$
1.2
2.9
4.1
$
$
Change
—
0.2
0.2
—%
6.9%
4.9%
The slight increase in our alternative market healthcare facilities premium during 2017 was primarily due to new
business written and, to a lesser extent, an increase in renewal pricing primarily due to increases in exposure related to a
few policies, partially offset by retention losses.
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
2017
2016
$
$
31.6
5.8
2.1
3.6
5.4
48.5
$
$
32.8
17.4
3.4
3.8
5.1
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:
Physicians*
Healthcare facilities*
Other healthcare providers*
Legal professionals
Medical technology liability
Year Ended December 31
2017
2016
90%
86%
85%
84%
87%
88%
79%
85%
78%
85%
* Excludes certain policies written on an excess and surplus lines basis.
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.
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Changes in renewal pricing by component was as follows:
Physicians (1)(2)
Healthcare facilities (1)(2)
Other healthcare providers (1)
Legal professionals (2)
Medical technology liability
Year Ended
December 31
2017
1%
8%
2%
3%
1%
(1) Excludes certain policies written on an excess and surplus lines basis.
(2) See Gross Premiums Written section for further explanation of renewal pricing
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 healthcare professional liability coverages, we also retain from 5% - 12.5% of the
next $25 million of risk for coverages in excess of $1 million. For our medical technology liability coverages, we also retain
10% of the next $9 million of risk for coverages in excess of $1 million. We pay our reinsurers a ceding premium in exchange
for their accepting the risk, the ultimate amount of which is determined by the loss experience of the business ceded, subject to
certain minimum and maximum amounts.
Ceded premiums written for the years ended December 31, 2017 and 2016 were as follows:
($ in thousands)
Excess of loss reinsurance arrangements (1)
Premium ceded to Syndicate 1729 (2)
Other shared risk arrangements (3)
Premiums ceded to SPCs (4)
Other ceded premiums written
Reduction in premiums owed under reinsurance agreements, prior
accident years, net (5)
Total ceded premiums written
Year Ended December 31
$
2017
31,853
13,983
30,780
3,914
3,361
$
2016
30,037
23,832
26,737
3,963
3,521
Change
$
1,816
(9,849)
4,043
(49)
(160)
(1,189)
82,702
$
(7,083)
81,007
$
$
5,894
1,695
6.0%
(41.3%)
15.1%
(1.2%)
(4.5%)
(83.2%)
2.1%
(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
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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.
(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) As previously discussed, as a part of our alternative market solutions, all or a portion of certain healthcare
premium written is ceded to the SPCs in our Segregated Portfolio Cell Reinsurance segment under either excess
of loss or quota share reinsurance agreements, depending on the structure of the individual program. See the
Segment Operating Results - Segregated Portfolio Cell Reinsurance section for further discussion on the cession
to the SPCs from our Specialty P&C segment. The slight decrease in premiums ceded to the SPCs during 2017
was primarily driven by retention losses (see discussion in footnote 7 under the heading "Gross Premiums
Written").
(5) 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 reduction in premiums owed under reinsurance
agreements, prior accident years (as previously discussed)
Ratio, current accident year
Year Ended December 31
2017
15.1% 15.1%
2016
Change
— pts
(0.2%)
(1.3%)
15.3% 16.4%
1.1 pts
(1.1) 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:
($ in thousands)
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
2017
$ 537,583
87,760
$ 449,823
Year Ended December 31
2016
Change
$ 535,931
81,425
$ 454,506
$
$
1,652
6,335
(4,683)
0.3%
7.8%
(1.0%)
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
110
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
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 the majority 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 reductions, prior accident years (2)
Net Loss Ratios (1)
Year Ended December 31
2017
63.4%
(26.5%)
89.9 %
2016
58.5%
(30.2%)
88.7 %
Change
4.9 pts
3.7 pts
1.2 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 %
90.1 %
— 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 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 $119.4 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
111
million and $9.4 million, respectively, attributable to our legal professionals liability line of business. We re-evaluate our
previously established reserve each quarter based on our most recently available claims data and currently available industry
trend information. Development recognized during 2017 principally related to accident years 2010 through 2014. Development
recognized during 2016 principally related to accident years 2009 through 2013.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting
Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our
reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are
reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions
can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2017
and 2016.
Underwriting, Policy Acquisition and Operating Expenses
Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31,
2017 and 2016 were comprised as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Specialty P&C segment:
DPAC amortization
Management fees
Other underwriting and operating expenses
Total
$
$
47,611
6,620
53,741
107,972
$
$
44,342
6,447
52,867
103,656
$
$
3,269
173
874
4,316
7.4%
2.7%
1.7%
4.2%
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 gross premium written by the subsidiary. While the terms of the management agreement were
consistent between 2017 and 2016, fluctuations in the amount of gross 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
2017
24.0%
2016
Change
22.8%
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.
112
Segregated Portfolio Cell Dividend Expense (Income)
In the third quarter of 2018, we reorganized our segment reporting which resulted in the creation of a new segment:
Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment provides the results of SPCs at our
Eastern Re and Inova Re subsidiaries, including SPCs that assume healthcare professional liability business which were
previously reported within our Specialty P&C segment. As such, there is no longer an SPC dividend expense reported in the
Specialty P&C segment associated with these SPCs and prior period information has been recast to conform to the current
period presentation. See more information on our Cayman Islands SPC operations in the Segment Operating Results -
Segregated Portfolio Cell Reinsurance section that follows.
The SPC dividend expense for the year ended December 31, 2017 represented a one-time $5.2 million pre-tax expense
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, 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.
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Segment Operating Results - Workers' Compensation Insurance
As previously discussed, we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation
of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting results of the SPCs that assume workers'
compensation business were previously reported in our Workers' Compensation segment and are now reported in our
Segregated Portfolio Cell Reinsurance segment. The traditional workers' compensation business remains in the Workers'
Compensation segment which has been renamed to "Workers' Compensation Insurance." All prior period segment information
has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the
Notes to Consolidated Financial Statements.
Our Workers' Compensation Insurance segment provides workers' compensation products to employers generally with
1,000 or fewer employees. Workers' compensation products offered include guaranteed cost policies, policyholder dividend
policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market products include
program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management
services. Alternative market premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance
segment or, to a limited extent, unaffiliated captive insurers. Our Workers' Compensation Insurance segment operating results
reflected pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which
are included in our Corporate segment. See further information regarding our segments in Note 16 of the Notes to Consolidated
Financial Statements. 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
Segment operating results
Net loss ratio
Underwriting expense ratio
Premiums Written
Year Ended December 31
$
$
$
$
$
$
2017
173,566
163,309
2,096
(102,233)
(52,576)
10,596
62.6%
32.2%
2016
163,513
161,988
2,218
(107,791)
(53,597)
2,818
66.5%
33.1%
$
$
$
Change
10,053
1,321
(122)
5,558
1,021
7,778
6.1%
0.8%
(5.5%)
(5.2%)
(1.9%)
276.0%
(3.9) pts
(0.9) pts
Our workers’ compensation premium volume is driven by five primary factors: (1) the amount of new business written,
(2) audit premium, (3) retention of our existing book of business, (4) premium rates charged on our renewal book of business
and (5) changes in payroll exposure.
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
264,048 $
90,482
173,566 $
2016
248,875 $
85,362
163,513 $
$
$
Change
15,173
5,120
10,053
6.1%
6.0%
6.1%
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Gross Premiums Written
Gross premiums written by product were as follows:
($ in thousands)
2017
2016
Change
Year Ended December 31
Traditional business:
Guaranteed cost
Policyholder dividend
Deductible
Retrospective
Other
Alternative market business
$
143,141
$
128,304
$
20,388
8,362
3,428
8,185
80,544
21,547
9,006
5,337
8,766
75,915
248,875
14,837
(1,159)
(644)
(1,909)
(581)
4,629
11.6%
(5.4%)
(7.2%)
(35.8%)
(6.6%)
6.1%
6.1%
Total
$
264,048
$
$
15,173
Gross premiums written in our traditional business business increased during the year ended December 31, 2017 as
compared to 2016, which reflected new business written, partially offset by a decrease in renewal pricing and a decrease in
audit premium. New business written included $4.6 million of premium related to our Eastern Specialty Risk unit and $3.4
million of premium related to the acquisition of Great Falls' book of business. The growth in our alternative market business
was driven by new business written, partially offset by a decrease in renewal pricing. We retained the 23 alternative market
programs up for renewal for the year ended December 31, 2017. During 2017, we added one new alternative market program at
Eastern Re that was a designed consolidation of two unaffiliated captive programs.
New business, audit premium, retention and renewal price changes for both the traditional business and the alternative
market business are shown in the table below:
($ in millions)
$
New business
Audit premium (including EBUB) $
Retention rate (1)
Change in renewal pricing (2)
Year Ended December 31
2017
Traditional
Business
37.8
2.7
85 %
(3%)
$
$
Alternative
Market
Business
9.9
1.4
92 %
(4%)
$
$
Segment
Results
47.7
4.1
87 %
(3%)
$
$
2016
Alternative
Market
Business
Segment
Results
Traditional
Business
$
$
22.8
5.2
84 %
(1%)
$
$
10.2
1.1
88 %
(1%)
33.0
6.3
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.
115
Ceded Premiums Written
Ceded premiums written were as follows:
($ in thousands)
Premiums ceded to SPCs
Premiums ceded to external reinsurers
Premiums ceded to unaffiliated captive insurers
Change in return premium estimate under external
reinsurance
Total ceded premiums written
$
$
Year Ended December 31
2017
73,761 $
9,823
6,784
2016
68,258 $
10,255
7,658
Change
5,503
(432)
(874)
8.1%
(4.2%)
(11.4%)
114
90,482 $
(809)
85,362 $
923
(114.1%)
5,120
6.0%
Our Workers' Compensation Insurance segment cedes alternative market business under a 100% quota share reinsurance
agreement, net of a ceding commission, to SPCs in our Segregated Portfolio Cell Reinsurance segment. The ceding commission
consists of an amount for fronting fees, cell rental fees, commissions, premium taxes, claims administration fees and risk
management fees. The fronting fees, commissions, premium taxes and risk management fees are recorded as an offset to
underwriting, policy acquisition and operating expenses (see discussion that follows under the heading "Underwriting, Policy
Acquisition and Operating Expenses"). Cell rental fees are recorded as a component of other income and claims administration
fees are recorded as ceded ULAE. The increase in premiums ceded to SPCs primarily reflected growth in our alternative market
business, as previously discussed.
Under our external reinsurance agreement, we retain the first $0.5 million in risk insured by us and cede losses in excess
of this amount on each loss occurrence under our primary external reinsurance contract. Per our reinsurance agreements, we
cede premiums related to our traditional business on an earned premium basis. The decrease in premiums ceded to external
reinsurers during the year ended December 31, 2017 as compared to 2016 primarily reflected an increase in revenue sharing
with our reinsurance broker, partially offset by an increase in premiums earned and reinsurance rates.
The decrease in premiums ceded to unaffiliated captive insurers reflected the consolidation of the two programs into the
new alternative market program at Eastern Re, as discussed above under the heading "Gross Premiums Written."
Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended
December 31, 2017 and 2016. The decrease in the return premium estimate for the year ended December 31, 2017 primarily
reflected severity-related claims activity during 2017.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Ceded premiums ratio, as reported
Less the effect of:
Premiums ceded to SPCs (100%)
Premiums ceded to unaffiliated captive insurer (100%)
Return premium estimated under external reinsurance
Assumed premiums earned
Ceded premiums ratio, less the effects of above
Year Ended December 31
2017
35.7%
2016
Change
34.4%
1.3 pts
25.9%
4.1%
(0.1%)
(0.3%)
6.1%
24.3%
4.6%
0.5%
(0.3%)
5.3%
1.6 pts
(0.5) pts
(0.6) pts
— pts
0.8 pts
The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede
premiums related to our traditional business to external reinsurers on an earned premium basis. The increase in the ceded
premiums ratio for the year ended December 31, 2017 as compared to 2016 primarily reflected the increase in reinsurance
rates.
116
Net Premiums Earned
Net premiums earned were as follows:
($ in thousands)
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
Year Ended December 31
2017
253,944 $
90,635
163,309 $
2016
247,092 $
85,104
161,988 $
$
$
Change
6,852
5,531
1,321
2.8%
6.5%
0.8%
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to SPCs in our
Segregated Portfolio Cell Reinsurance segment, external reinsurers or unaffiliated captive insurers. 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. We increased the EBUB estimate by $0.4 million for the year ended
December 31, 2016. The increase in net premiums earned primarily reflected the pro rata effect of higher net premiums written
during the preceding twelve months.
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:
Calendar year net loss ratio
Less impact of prior accident years on the
net loss ratio
Current accident year net loss ratio
Year Ended December 31
2017
62.6%
2016
66.5%
Change
(3.9) pts
(3.5%)
66.1%
(1.0%)
67.5%
(2.5) pts
(1.4) pts
The current accident year net loss ratio for the year ended December 31, 2017 was 66.1% as compared to 67.5% for 2016.
The improvement in the current accident year net loss ratio primarily reflected more favorable trends in claims closing results
in 2017 as compared to 2016, which reduced loss indications for the 2017 accident year.
Current accident year incurred losses (excluding IBNR) ceded to our external reinsurers totaled $9.8 million for the year
ended December 31, 2017 as compared to ceded incurred losses of $6.9 million for 2016. The increase in ceded incurred losses
in 2017 primarily reflected the aforementioned increase in severity-related claim activity.
We recognized net favorable prior year development related to our previously established reserve of $5.7 million for the
year ended December 31, 2017 as compared to $1.6 million for 2016. The net favorable prior year development in 2017
reflected overall favorable trends in claim closing patterns, primarily in the 2015 and 2016 accident years. For each of the years
ended December 31, 2017 and 2016, the net favorable prior year development included $1.6 million related to amortization of
the purchase accounting fair value adjustment.
We estimate our current accident year loss and loss adjustment expenses based on an expected loss ratio. Incurred losses
and loss adjustment expenses are determined by applying the expected loss ratio to net premiums earned, which includes audit
premium, for the respective period.
117
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses includes the amortization of commissions, premium taxes and
underwriting salaries, which are capitalized and deferred over the related workers’ compensation policy period, net of ceding
commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our contract
acquisition efforts. These expenses also include a management fee charged by our Corporate segment, which represents
intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily related to the
acquisition of Eastern by ProAssurance. The management fee is based on the extent to which services are provided to the
subsidiary and the amount of gross premium written by the subsidiary.
Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised
as follows:
($ in thousands)
DPAC amortization
Management fees
Other underwriting and operating expenses
SPC commission income offset
Total
Year Ended December 31
2017
31,433
1,975
36,791
(17,623)
52,576
$
$
2016
29,325
1,857
39,159
(16,744)
53,597
$
$
Change
$
2,108
118
(2,368)
(879)
(1,021)
$
7.2%
6.4%
(6.0%)
5.2%
(1.9%)
The increase in DPAC amortization for the year ended December 31, 2017 as compared to 2016 primarily reflected the
increase in net premiums earned. The decrease in other underwriting and operating expenses for the year ended December 31,
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.
Alternative market premiums written through our Workers' Compensation Insurance segment's alternative market
business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell Reinsurance
segment or, to a limited extent, unaffiliated captive insurers. SPC ceding commission income includes fronting fees,
commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and
operating expenses.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Underwriting expense ratio, as reported
Less estimated ratio increase (decrease) attributable to:
Impact of commission income received from SPCs
Amortization of intangible assets
Management fees
Impact of audit premium
Underwriting expense ratio, less listed effects
Year Ended December 31
2017
32.2%
2016
33.1%
Change
(0.9) pts
3.4%
1.2%
0.8%
(0.3%)
27.1%
3.5%
2.2%
0.8%
(0.6%)
27.2%
(0.1) pts
(1.0) pts
— pts
0.3 pts
(0.1) pts
The expense ratio, exclusive of the items noted in the table above, was consistent from 2016 to 2017.
118
Segment Operating Results - Segregated Portfolio Cell Reinsurance
As previously discussed, we reorganized our segment reporting during the third quarter of 2018 which resulted in the
creation of the Segregated Portfolio Cell Reinsurance segment. All prior period information has been recast to conform to the
current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial
Statements.
The Segregated Portfolio Cell Reinsurance segment for the years ended December 31, 2017 and 2016 reflects the
operating results (underwriting profit or loss, plus investment results) of SPCs at Eastern Re, our Cayman Islands SPC
operation. As of December 31, 2017, there were 24 (21 active) SPCs. The SPCs assume workers' compensation insurance,
healthcare professional liability insurance or a combination of the two from our Workers' Compensation Insurance and
Specialty P&C segments. 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. Each SPC is owned, fully or
in part, by an agency, group or association and the operating results of the SPCs are due to the participants of that cell. We
participate to a varying degree in the results of selected SPCs and, for the SPCs in which we participate, our ownership interest
is as low as 25% and as high as 85%. SPC operating results due to external cell participants are reflected as a SPC dividend
expense in our Segregated Portfolio Cell Reinsurance segment. In addition, our Segregated Portfolio Cell Reinsurance segment
includes the SPC investment results as the investments are solely for the benefit of the cell participants and investment results
due to external cell participants are reflected in the SPC dividend expense. Segment operating results reflects our share of the
underwriting and investment results of the SPCs in which we participate, and included the following:
Net premiums written
($ in thousands)
Net premiums earned
Net investment income
Net realized gains (losses)
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
SPC net operating results
SPC dividend (expense) income(1)
Segment operating results(2)
$
$
Year Ended December 31
2017
68,862 $
2016
64,028 $
Change
4,834
7.5%
68,197 $
1,059
3,914
115
(37,455)
(20,764)
15,066
(10,590)
62,137 $
711
2,525
18
(35,232)
(18,936)
11,223
(8,142)
3,081 $
6,060
348
1,389
97
(2,223)
(1,828)
3,843
(2,448)
1,395
9.8%
48.9%
55.0%
538.9%
6.3%
9.7%
34.2%
30.1%
45.3%
$
4,476 $
Net loss ratio
Underwriting expense ratio
54.9%
30.4%
56.7%
30.5%
(1.8) pts
(0.1) pts
(1) Represents the operating (profit) loss due to external cell participants.
(2) Represents our share of the operating profit (loss) of the SPCs in which we participate.
119
Premiums Written
Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% assumed from either our Workers'
Compensation Insurance or Specialty P&C segments. SPC premium volume is driven by five primary factors: (1) the amount
of new business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of
business and, for workers' compensation business, (4) audit premium and (5) changes in payroll exposure.
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
$ 77,675
8,813
2016
$ 72,221
8,193
$ 68,862
$ 64,028
Change
$ 5,454
620
$ 4,834
7.6%
7.6%
7.5%
Gross Premiums Written
Gross premiums written reflected reinsurance premiums assumed by component as follows:
Year Ended December 31
($ in thousands)
Workers' compensation
Healthcare professional liability
2017
$ 73,761
3,914
2016
$ 68,258
3,963
Gross Premiums Written
$ 77,675
$ 72,221
Change
$ 5,503
(49)
$ 5,454
8.1%
(1.2%)
7.6%
Gross premiums written for the years ended December 31, 2017 and 2016 was primarily comprised of workers'
compensation coverages assumed from our Workers' Compensation Insurance segment. Gross premiums written increased
during 2017 as compared 2016, 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 insurers included our Workers' Compensation Insurance segment.
New business, audit premium, retention and renewal price changes for the assumed workers' compensation premium is
shown in the table below:
($ in millions)
Year Ended December 31
2017
2016
New business
Audit premium (including EBUB)
Retention rate (1)
Change in renewal pricing (2)
(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.
9.9
1.4
92%
(4%)
$
$
$
$
10.2
1.1
88%
(1%)
(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.
Ceded Premiums Written
Ceded premiums written were as follows:
($ in thousands)
2017
2016
Change
Ceded premiums written
$ 8,813 $ 8,193 $
620
7.6%
Year Ended December 31
For the workers' compensation business, each SPC has in place its own external reinsurance arrangements. The healthcare
professional liability business is assumed net of reinsurance from our Specialty P&C segment; therefore, there are no ceded
premiums related to the healthcare professional liability business reflected in the table above. The risk retention for each loss
120
occurrence ranges from $0.3 million to $0.35 million based on the program. Per the SPC external reinsurance agreements,
premiums are ceded on a written premium basis and the increase in premiums ceded to external reinsurers for the year ended
December 31, 2017 primarily reflected an increase in premiums written in certain programs. External reinsurance rates vary
based on the alternative market program.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Ceded premiums ratio
Year Ended December 31
2017
11.9%
2016
12.0%
Change
(0.1) pts
The above table reflects ceded premiums as a percent of gross premiums written for the workers' compensation business
only; healthcare professional liability business is assumed net of reinsurance, as discussed above. The ceded premiums ratio
remained relatively unchanged for the year ended December 31, 2017 as compared to 2016.
Net Premiums Earned
Gross, ceded and net premiums earned were as follows:
Year Ended December 31
($ in thousands)
2017
2016
Change
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
$ 76,911 $ 70,209 $
8,714
8,072
$ 68,197 $ 62,137 $
6,702
642
6,060
9.5%
8.0%
9.8%
Net premiums earned consist of gross premiums earned less the portion of earned premiums that the SPCs cede to
external reinsurers. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums
earned tend to lag those of premiums written. Policies ceded to the SPCs are twelve month term 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
workers' compensation 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. The increase in net premiums earned primarily reflected
the pro rata effect of higher net premiums written during the preceding twelve months.
Net Investment Income and Net Realized Investment Gains (Losses)
Net investment income for the years ended December 31, 2017 and 2016 was primarily attributable to interest earned on
available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. Net realized
investment gains for the years ended December 31, 2017 and 2016 primarily reflected changes in the value of the SPCs' equity
trading portfolio.
Losses and Loss Adjustment Expenses
The following table summarizes the 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 were 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 impact of audit premium related to workers'
compensation business
Current accident year net loss ratio, excluding the effect of
audit premium
Year Ended December 31
2017
54.9%
(12.5%)
67.4%
2016
56.7%
(7.4%)
64.1%
Change
(1.8) pts
(5.1) pts
3.3 pts
(1.4%)
(1.2%)
(0.2) pts
68.8%
65.3%
3.5 pts
121
The current accident year net loss ratio reflected the aggregate loss ratio for all programs. Loss reserves are estimated for
each program on a quarterly basis. Due to the size 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 accident year net loss ratio
primarily reflected severity-related claims activity during the fourth quarter of 2017.
Current accident year incurred losses ceded to our external reinsurers totaled $3.2 million for the year ended
December 31, 2017, compared to $3.0 million for 2016.
We recognized net favorable prior year development of $8.5 million and $4.6 million for the years ended December 31,
2017 and 2016, respectively. The 2017 favorable development primarily reflected better than expected claim trends related to
accident years 2015 and 2016, and the 2016 favorable development primarily reflected favorable claim trends related to
accident year 2015. The improved claim trends reflected lower frequency and severity than anticipated at the time the reserves
were established.
Audit premium from workers' compensation insureds results in a decrease in the net loss ratio, whereas audit premium
returned to workers' compensation insureds results in an increase in the net loss ratio. We recognized audit premium of $1.4
million and $1.1 million for the years ended December 31, 2017 and 2016, respectively, the effect of which is reflected in the
previous table. We estimate our current accident year losses and loss adjustment expenses based on the underlying actuarial
methodologies without consideration of audit premium. As a result, we removed the effects of audit premium in the previous
table for purposes of evaluating the current accident year net loss ratio.
Underwriting, Policy Acquisition and Operating Expenses
Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were
comprised as follows:
($ in thousands)
DPAC amortization
Other underwriting and operating
expenses
Total
Year Ended December 31
2016
Change
$ 18,385
$ 1,542
8.4%
2017
$ 19,927
837
$ 20,764
551
$ 18,936
286
$ 1,828
51.9%
9.7%
DPAC amortization primarily represented the amortization of ceding commissions, which vary by program and are paid
to our Workers' Compensation Insurance and Specialty P&C segments for premiums assumed. Ceding commissions include an
amount for fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to
underwriting, policy acquisition and operating expenses within our Workers' Compensation Insurance and Specialty P&C
segments. In addition, ceding commissions paid to our Workers' Compensation Insurance segment include cell rental fees
which are recorded as other income within our Workers' Compensation Insurance segment.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Underwriting expense ratio, as reported
Less impact of audit premium on expense ratio
Underwriting expense ratio, excluding the effect
of audit premium
Year Ended December 31
2016
2017
30.4% 30.5%
(0.6%)
(0.6%)
Change
(0.1) pts
— pts
31.0% 31.1%
(0.1) pts
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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 2019 of up to $200 million, referred to as FAL. The
Board, through a non-binding resolution, extended this commitment through 2022. For the 2018 underwriting year, our FAL
was comprised of investment securities deposited with Lloyd's 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% for the 2017 underwriting year) 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%.
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 for the 2018 underwriting year Syndicate 6131 had a maximum
underwriting capacity of £8.0 million (approximately $10.8 million at December 31, 2017) and focuses on contingency and
specialty property business.
We normally report results from our involvement in Lloyd's Syndicates on a quarter delay, except when information is
available that is material to the current period. Furthermore, the investment results associated with our FAL investments and
certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame.
In addition to the results of our participation in Syndicate 1729, as discussed above, our Lloyd's Syndicate segment also
includes 100% of the operating results of our wholly owned subsidiaries that support our operations at Lloyd's. For the years
ended December 31, 2017 and 2016, the results of our Lloyd's Syndicate segment were as follows:
($ 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.
123
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
124
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 14.9 percentage points 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 accounted for
approximately 11.2 percentage points of the increase in the net loss ratio. 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.
125
Segment Operating Results - Corporate
As previously discussed, we reorganized our segment reporting during the third quarter of 2018 which resulted in the
creation of a new segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment includes
the results of investment assets solely allocated to SPC operations at our Cayman Islands reinsurance subsidiaries which were
previously reported in our Corporate segment. All prior period segment information has been recast to conform to the current
period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial
Statements.
Our Corporate segment includes our investment operations, other than those reported in our Segregated Portfolio Cell
Reinsurance and Lloyd's Syndicate segments, interest expense and U.S. income taxes. Our Corporate segment also includes
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
Interest expense
Income tax expense (benefit)
2017
$ 92,867
$
8,033
$ 12,388
$ 29,275
$ 16,844
$ 21,927
Year Ended December 31
2016
Change
$ (5,024)
$ 97,891
$ (5,762) $ 13,795
$ (19,886)
$ 32,274
$ (1,532)
$
1,812
$ (2,809)
$ 30,807
$ 15,032
$ 24,736
(5.1%)
239.4%
61.6%
(5.0%)
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
2017
$ 72,665
17,198
7,643
1,979
(6,618)
$ 92,867
Year Ended December 31
2016
Change
$ 83,517
14,887
3,343
2,008
(5,864)
$ 97,891
$ (10,852)
2,311
4,300
(29)
(754)
$ (5,024)
(13.0%)
15.5%
128.6%
(1.4%)
12.9%
(5.1%)
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 2017 in order to pay dividends and invest in other asset
classes. On an overall basis, our average investment in fixed maturity securities was approximately 8% 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%
126
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 was as follows:
($ in thousands)
Investment 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)
9,630
4,165
$ (5,762) $ 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.
127
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
$ 92,867
8,033
$ 100,900
$ 97,891
(5,762)
$ 92,129
Pro forma tax-equivalent investment result
$ 148,553
$ 149,248
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
$ 100,900
$ 92,129
9,103
1,065
1,930
35,555
$ 148,553
11,698
1,081
1,957
42,383
$ 149,248
128
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 recognized in OCI:
Corporate debt
Net impairment losses recognized in earnings
Gross realized gains, available-for-sale fixed maturities
Gross realized (losses), available-for-sale fixed maturities
Net realized gains (losses), equity investments
Net realized gains (losses), other investments
Change in unrealized holding gains (losses), equity investments
Change in unrealized holding gains (losses), convertible securities, carried at fair
value as a part of other investments
Other
Net realized investment gains (losses)
Year Ended December 31
2017
2016
$
(850) $
(419)
(11,931)
—
(100)
(7,604)
—
(3,130)
248
(12,952)
6,622
(3,092)
10,109
2,963
7,837
1,068
(9,766)
12,369
(7,027)
6,646
1,115
28,013
896
5
12,388
$
899
25
32,274
$
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 $3.1 million OTTI in earnings during 2016 related to our interest in an investment fund that is
accounted for using the cost method (classified as other investments). The fund is focused on the energy sector and securities
held by the fund declined in value during 2016. An OTTI was recognized to reduce our carrying value of the investment to the
NAV reported by the fund.
129
Operating Expenses
Corporate segment operating expenses for the years ended December 31, 2017 and 2016 were comprised as follows:
($ 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%)
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 Insurance 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 gross 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 gross 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 for the years ended December 31, 2017 and 2016 was comprised as follows:
($ in thousands)
Senior Notes due 2023
Revolving Credit Agreement (including fees and amortization)
Mortgage Loans (including amortization)
(Gain)/loss on interest rate cap
Other
Interest expense
Year Ended December 31
2017
$ 13,429
2,974
65
339
37
$ 16,844
2016
$ 13,429
1,564
—
—
39
$ 15,032
$
$
Change
—
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 10 and further discussion of our interest rate cap agreement in Note 11 of the Notes to Consolidated
Financial Statements.
130
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
Provision-to-return differences
Other
Effective tax rate
Year Ended
December 31
2017
35.0%
(6.5%)
(18.0%)
0.7%
(2.1%)
5.1%
2.7%
(1.5%)
1.2%
16.6%
2016
35.0%
(5.6%)
(15.6%)
(1.0%)
—%
—%
—%
0.7%
0.8%
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
131
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
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 included in
ProAssurance's December 31, 2017 Form 10-K for further discussion on the adoption of this guidance.
132
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, 2018 and December 31, 2017. There are
principally two factors that determine interest rates on a given security: changes in the level of yield curves and credit spreads.
As different asset classes can be affected in different ways by movements in those two factors, we have separated our portfolio
by asset class in the following tables.
($ in millions)
(200)
(100)
Current
100
200
Interest Rate Shift in Basis Points
December 31, 2018
Fair Value:
Fixed maturities, available for sale:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
Total fixed maturities, available for sale
$
$
127
36
316
1,300
443
2,222
$
$
124
36
305
1,261
432
2,158
$
$
120
35
294
1,224
421
2,094
$
$
117
34
283
1,187
409
2,030
$
$
Duration:
Fixed maturities, available for sale:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
Total fixed maturities, available for sale
2.77
0.66
3.61
2.98
2.18
2.86
2.70
0.98
3.58
2.97
2.46
2.91
2.63
2.65
3.59
2.93
2.86
2.99
2.57
3.77
3.64
2.89
3.11
3.04
114
33
273
1,153
396
1,969
2.50
4.18
3.73
2.83
3.23
3.04
133
($ in millions)
(200)
(100)
Current
100
200
Interest Rate Shift in Basis Points
December 31, 2017
Fair Value:
Fixed maturities, available for sale:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
$
142
$
138
$
134
$
130
$
22
683
1,249
341
21
657
1,208
335
21
632
1,167
326
20
609
1,128
315
126
19
585
1,090
302
Total fixed maturities, available for sale
$
2,437
$
2,359
$
2,280
$
2,202
$
2,122
Duration:
Fixed maturities, available for sale:
U.S. Treasury obligations
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
Total fixed maturities, available for sale
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
2.79
4.87
3.85
3.34
4.24
3.59
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.
At December 31, 2018, our fixed maturities portfolio includes an immaterial amount of fixed maturities classified as
trading securities. Because these trading securities are immaterial, there is not a significant amount of exposure to market
interest rates or credit spreads.
Our cash and short-term investments portfolio at December 31, 2018 was carried at fair value which approximates their
cost basis due to their short-term nature. Our cash and short-term investments 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 1% 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 1% 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 3.675% (see Note 11 of the Notes to
Consolidated Financial Statements for additional information). The fair value of the interest rate cap is not materially impacted
by a 1% 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 1% 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 1% 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. As of December 31, 2018, no borrowings were outstanding under our Revolving Credit Agreement.
134
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, 2018, 94% 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; therefore, we may be subject to additional credit exposure should the ratings prove to be
unreliable.
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 $355 million at December 31, 2018 and $343 million at December 31,
2017. We monitor the credit risk associated with our reinsurers using publicly available financial and rating agency data.
Equity Price Risk
At December 31, 2018, the fair value of our equity investments, excluding our equity investments in bond investment
funds as discussed in the following paragraph, was $248 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 0.90. 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 9.0% to $270 million. Conversely, a 10% decrease in the S&P 500 Index
would imply a decrease of 9.0% in the fair value of these securities to $226 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 subject to significant
equity price risk, and thus we have excluded these investments from the above analysis.
135
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2018 and December 31, 2017
Consolidated Statements of Changes in Capital - Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 2018, 2017
and 2016
Consolidated Statements of Cash Flows - Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
141
142
143
144
145
147
The Supplementary Financial Information required by Item 302 of Regulation S-K is included in Note 19 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 principal executive and principal financial
officers, 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, 2018. Based on that evaluation, the principal executive and principal financial
officers 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 principal executive
and principal financial officers, 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 principal executive and principal financial officers, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2018 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, 2018 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, 2018 as stated in their report which is included elsewhere herein.
ITEM 9B. OTHER INFORMATION
None.
136
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, 2018, 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, 2018, 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 as of December 31, 2018 and 2017, 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, 2018, 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, 2019 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, 2019
137
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 2019 Annual Meeting of its Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A on or about April 12, 2019.
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 2019 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 12, 2019.
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 2019 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 12, 2019.
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 2019 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 12, 2019.
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 2019 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 12, 2019.
138
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, 2018 and 2017
Consolidated Statements of Changes in Capital – years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Income and Comprehensive Income – years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows – years ended December 31, 2018, 2017 and 2016
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.
139
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 2019.
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)
February 21, 2019
/S/ EDWARD L. RAND, JR.
Edward L. Rand, Jr.
President and Chief Operating Officer
(Principal Financial Officer)
/S/ DANA S. HENDRICKS
Dana S. Hendricks
Chief Financial Officer
(Principal Accounting 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, J.D.
/S/ JOHN J. MCMAHON, JR.
Director
John J. McMahon, Jr.
/S/ KATISHA T. VANCE, M.D.
Katisha T. Vance, M.D.
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.
/S/ KEDRICK D. ADKINS, JR.
Kedrick D. Adkins, Jr.
Director
140
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
February 21, 2019
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, 2018 and 2017, 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, 2018, and the related notes and financial
statement schedules listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2018, 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, 2018, 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, 2019 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, 2019
141
ProAssurance Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Investments
Fixed maturities, at fair value; cost or amortized cost, $2,155,270 and $2,257,188,
respectively
Equity investments, at fair value; cost, $450,931 and $425,942, respectively
Short-term investments
Business owned life insurance
Investment in unconsolidated subsidiaries
Other investments, $31,344 and $52,301 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, 62,989,421 and
62,824,523 shares issued, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of
($4,355) and $5,218, respectively
Retained earnings
Treasury shares, at cost, 9,352,373 shares and 9,367,502 shares, respectively
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
See accompanying notes.
142
December 31,
2018
December 31,
2017
$ 2,131,986
442,937
308,319
64,096
367,757
$ 2,280,242
470,609
432,126
62,113
330,591
34,287
110,847
3,349,382
80,471
261,466
11,558
343,820
40,631
54,116
29,108
31,114
76,776
210,725
111,559
$ 4,600,726
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
$ 2,119,847
415,211
55,614
2,590,672
199,295
287,757
3,077,724
$ 2,048,381
398,884
37,726
2,484,991
437,600
411,811
3,334,402
630
384,713
628
383,077
(16,911)
1,571,847
(417,277)
1,523,002
14,911
1,614,186
(418,007)
1,594,795
$ 4,600,726
$ 4,929,197
ProAssurance Corporation and Subsidiaries
Consolidated Statements of Changes in Capital
(In thousands)
Balance at January 1, 2016
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
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
Balance at December 31, 2017
Cumulative-effect adjustment-
ASU 2016-01 adoption*
Cumulative-effect adjustment-
ASU 2018-02 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
Common
Stock
$
625
—
Additional
Paid-in
Capital
$ 365,399
—
—
—
2
—
—
—
627
—
—
—
1
—
—
—
628
—
—
—
—
2
—
—
—
1,696
12,455
(3,032)
—
—
—
376,518
425
957
10,615
(5,438)
—
—
—
383,077
—
—
314
5,258
(3,936)
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
23,855
$
Retained
Earnings
$ 1,988,035
Treasury
Stock
Total
$(419,560) $ 1,958,354
(2,106)
(2,106)
1,736
—
—
—
—
—
(419,930)
3,432
12,455
(3,030)
(315,028)
(6,456)
151,081
1,798,702
—
—
—
—
(315,028)
—
151,081
1,824,088
(276)
—
149
—
—
1,923
—
2,880
10,615
—
—
—
—
—
(6,456)
—
17,399
—
—
—
—
—
(2,488)
—
14,911
—
(316,890)
—
107,264
1,614,186
—
—
—
—
(418,007)
(5,437)
(316,890)
(2,488)
107,264
1,594,795
—
8,334
3,416
(3,416)
—
—
—
—
—
—
(94,314)
—
—
(35,238)
—
47,057
(16,911) $ 1,571,847
—
—
730
—
8,334
—
1,044
5,258
—
—
(3,934)
(94,314)
(35,238)
47,057
$(417,277) $ 1,523,002
—
—
Balance at December 31, 2018
$
630
$ 384,713
$
* See Note 1 of the Notes to Consolidated Financial Statements for discussion of accounting guidance adopted during the year.
See accompanying notes.
143
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 (loss)
Earnings per share
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Cash dividends declared per common share
See accompanying notes.
Year Ended December 31
2018
2017
2016
$
818,853
$
91,884
8,948
$
738,531
95,662
8,033
733,281
100,012
(5,762)
(490)
(13,200)
(10,834)
—
(490)
(42,998)
(43,488)
9,833
886,030
248
(12,952)
29,361
16,409
7,514
866,149
1,068
(9,766)
44,641
34,875
7,808
870,214
593,210
469,158
443,229
134,055
104,501
9,122
16,117
857,005
29,025
(6,208)
(11,824)
(18,032)
47,057
(35,238)
11,819
0.88
0.88
53,598
53,749
$
$
$
140,002
95,751
15,771
16,844
737,526
128,623
19,666
1,693
21,359
107,264
(2,488)
104,776
2.01
2.00
53,393
53,611
$
$
$
1.74
$
5.93
$
139,232
88,378
8,142
15,032
694,013
176,201
16,586
8,534
25,120
151,081
(6,456)
144,625
2.84
2.83
53,216
53,448
5.93
$
$
$
$
144
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
2018
2017
2016
$
47,057
$
107,264
$
151,081
Depreciation and amortization, net of accretion
(Increase) decrease in cash surrender value of BOLI
Net realized investment (gains) losses
Share-based compensation
Deferred income tax expense (benefit)
Policy acquisition costs, net of amortization (net deferral)
Equity in (earnings) loss of unconsolidated subsidiaries
Distributed earnings from 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
Fixed maturities, trading
Equity investments
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 investments
Other investments
Return of invested capital from unconsolidated subsidiaries
Net sales or maturities (purchases) of short-term investments
Unsettled security transactions, net change
Purchases of capital assets
Repayments (advances) under Syndicate Credit Agreement
Other
Net cash provided (used) by investing activities
Continued on following page.
145
21,255
(1,983)
43,488
5,321
(11,824)
(3,855)
(8,948)
31,219
1,168
(23,381)
4,697
(4,206)
71,466
16,327
(10,536)
177,265
(780,698)
(38,544)
(203,157)
(32,153)
—
(78,141)
914,021
210,481
29,815
84,534
123,886
(4,022)
(9,636)
(184)
(1,305)
214,897
28,796
(1,979)
(16,409)
10,615
1,693
(3,452)
(8,033)
24,392
108
(14,605)
(56,449)
(792)
54,953
26,321
20,965
173,388
(614,440)
—
(207,857)
(50,362)
(507)
(42,183)
932,070
146,356
25,372
32,539
4,167
(2,031)
(10,485)
(10,339)
(2,025)
200,275
32,789
(2,008)
(34,875)
12,455
8,534
(2,421)
5,762
9,863
1,772
(6,446)
(26,108)
15,665
(11,898)
10,497
14,321
178,983
(636,377)
—
(112,912)
(18,613)
(1,019)
(50,890)
752,516
85,226
13,797
7,084
(322,872)
1,388
(10,922)
(1,395)
6,187
(288,802)
Continued from the previous page.
Financing Activities
Borrowings (repayments) under Revolving Credit Agreement
Proceeds (repayments) of Mortgage Loans
Repurchase of common stock
Dividends to shareholders
Capital contribution received from (return of capital to) external segregated
portfolio cell participants
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
See accompanying notes.
Year Ended December 31
2018
2017
2016
(123,000)
(1,396)
—
(316,476)
(1,005)
(4,309)
(446,186)
(77,000)
40,460
—
(315,228)
2,936
(7,683)
(356,515)
(54,024)
134,495
80,471
$
17,148
117,347
134,495
5,726
16,165
$
$
17,193
15,892
100,000
—
(2,106)
(118,812)
9,952
(2,968)
(13,934)
(123,753)
241,100
117,347
(8,683)
14,732
$
$
$
43,446
$
267,292
$
265,659
$
$
$
$
146
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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 and the sole (100%) capital provider of a SPA, Syndicate 6131 at Lloyd's. Risks insured are
primarily liability risks located within the U.S.
Beginning in the third quarter of 2018, ProAssurance operates in five reportable segments as follows: Specialty P&C,
Workers' Compensation Insurance, Segregated Portfolio Cell Reinsurance, Lloyd's Syndicates and Corporate. For more
information on the Company's segment reporting, including the nature of products and services provided and financial
information by segment, refer to Note 16.
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 normally 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 ProAssurance's 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
As a result of the third quarter of 2018 segment reorganization, prior year segment information in Note 16 has been recast
to conform to the Company's current segment reporting (see Note 16 for further information).
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,
2018 and 2017. Neither estimated credit losses nor actual credit write-offs, net of recoveries, exceeded $0.5 million during the
years ended December 31, 2018 and 2017.
Earned But Unbilled Premiums
Workers’ compensation premiums are determined based upon the payroll of the insured, the 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. ProAssurance tracks, by policy, the amount of
147
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
additional premium billed in final audit invoices as a percentage of payroll exposure and uses this information to estimate the
probable additional amount of EBUB premium as of the balance sheet date. Changes to the EBUB estimate are included in net
premiums written and earned in the period recognized. As of December 31, 2018 and 2017, 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 LAE ("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 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 internal and consulting actuaries.
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 2018, 2017 and 2016.
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 LAE is the estimated amount of losses already paid that will be recoverable
from reinsurers. Receivable from reinsurers on unpaid losses and LAE 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.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Retroactive Insurance Contracts
In certain instances, ProAssurance’s insurance contracts cover losses both on a prospective basis and retroactive basis
and, accordingly, ProAssurance bifurcates the prospective and retroactive provisions of these contracts and accounts for each
component separately, where practicable.
Under the retroactive provisions of a contract, all premiums received and losses assumed are recognized immediately in
earnings at the inception of the contract as all of the underlying loss events occurred in the past. If the estimated losses assumed
differ from the premium received related to the retroactive provision of a contract, the resulting difference is deferred and
recognized over the estimated claim payment period with the periodic amortization reflected in earnings as a component of net
losses and LAE. Deferred gains are included as a component of the reserve for losses and LAE and deferred losses are included
as a component of other assets on the Consolidated Balance Sheet. Subsequent changes to the estimated timing or amount of
future loss payments in relation to the losses assumed under retroactive provisions also produce changes in deferred balances.
Changes in such estimates are applied retrospectively and the resulting changes in deferred balances, together with periodic
amortization, are included in earnings in the period of change.
Lloyd’s Premium Estimates
For certain insurance policies and reinsurance contracts written in the Lloyd’s Syndicates segment, premiums are initially
recognized based upon estimates of ultimate premium. Estimated ultimate premium consists primarily of premium written
under delegated underwriting authority arrangements, which consist primarily of binding authorities, 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.
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 the Company's 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
investments carried principally at cost, investments in tax credit partnerships and equity method investments that do not provide
a NAV, fixed assets, goodwill and other intangible assets.
Fixed Maturities
Fixed maturities 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 securities are carried at fair value, determined as described above, with the holding gains and losses included as a
component of net realized investment gains (losses) during the period of change.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Equity Investments
Equity investments are carried at fair value, as described above, with the holding gains and losses included as a
component of net realized investment gains (losses) during the period of change. Equity investments are primarily comprised of
stocks, bond funds and investment funds.
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 carried at fair value which
approximates the cost of the securities due to their short-term nature.
Other Investments
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.
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 included 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, 2018 and 2017 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; or
• 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:
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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 the Company's 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), 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.
These factors include, but are not limited to:
• ProAssurance's ability and intent to hold the investment until the recovery of its carrying value; and
• in situations where there was not a previous OTTI for the investment, 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; or
• in situations where there was a previous OTTI for the investment, whether the expected cash flows from the
investment at the time of the OTTI, primarily tax benefits, are less than its current 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 may 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 a current fair value of the investment that
is less than the carrying value.
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 reasons 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.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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, 2018, 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. In recording foreign currency
transactions, revenue and expense items are converted to U.S. dollars at the exchange rate prevailing at the transaction date.
Monetary assets and liabilities originating in currencies other than the U.S. dollar are remeasured to U.S. dollars at the rates of
exchange in effect as of the balance sheet date. The resulting foreign currency gains or losses are recognized in the
Consolidated Statements of Income and Comprehensive Income as a component of other income. Monetary assets and
liabilities include investments, cash and cash equivalents, accrued expenses and other liabilities. In addition, monetary assets
and liabilities include certain premiums receivable and reserve for losses and LAE as a result of reinsurance transactions
conducted with foreign cedants denominated in their local functional currencies.
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 and ceding commission earned is reported as an offset to DPAC amortization.
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, 2018 or 2017.
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.
A valuation allowance has been 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. In 2018, ProAssurance also established a valuation allowance against the deferred tax assets of certain SPCs at
its newly formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re. As of December 31, 2018, these newly
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
formed SPCs are in a cumulative pre-tax loss position, and management concluded that a valuation allowance was required
based upon the weight of this negative evidence. See further discussion in Note 6.
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, a change in how property and casualty
taxpayers discount loss reserves, a minimum tax on payments made to related foreign entities and a new tax on certain income
of controlled foreign corporations. See Note 6 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 $25.2 million and $24.0 million at December 31, 2018 and
2017, respectively. Real estate depreciation expense was $1.2 million, $1.1 million and $1.4 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
Intangible Assets
Intangible assets with definite lives are amortized over the estimated useful life of the asset. Amortizable intangible assets
primarily consist of policyholder relationships, renewal rights and trade names. Intangible assets with an indefinite life,
primarily state licenses, are not amortized. All intangible assets are evaluated for impairment on an annual basis or upon the
occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of the asset may be
impaired. The third quarter 2018 segment reorganization had no impact on how ProAssurance's evaluates intangible assets for
impairment. The following table provides additional information regarding ProAssurance's intangible assets.
Gross Carrying Value
December 31
Accumulated
Amortization
December 31
Amortization Expense
Year Ended December 31
(In millions)
2018
2017
2018
2017
2018
2017
2016
Intangible Assets
Non-amortizable
Amortizable
Total Intangible Assets
$
$
25.8
97.5
123.3
$
$
25.8
97.5
123.3
$
46.5
$
40.3
$
6.2
$
5.8
$
8.1
Aggregate amortization expense for intangible assets is estimated to be $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, 2022 and 2023.
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, upon the occurrence of certain triggering events
or substantive changes in circumstances that indicate the fair value of goodwill may be impaired, and immediately before and
after a reorganization that affects the composition of one or more of the Company's reporting units. Impairment of goodwill is
tested at the reporting unit level, which is consistent with the reportable segments identified in Note 16. Of the five reporting
units, three have goodwill: Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance.
Annual Goodwill Impairment Test
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
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Notes to Consolidated Financial Statements
December 31, 2018
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. As of the most recent annual evaluation date on October 1, 2018,
management elected to perform a quantitative goodwill impairment assessment for Specialty P&C, Workers' Compensation
Insurance and Segregated Portfolio Cell Reinsurance reporting units.
In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is determined using income
and market approaches and is compared to its carrying value, as described above. 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 derived from market information. 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. Because not all of ProAssurance's
reporting units have goodwill, management makes certain assumptions regarding the fair value of the Company's other
reporting units in reconciling to ProAssurance's market capitalization.
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 of goodwill, if any. 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 fair value of goodwill. 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.
As a result of the quantitative assessments performed on October 1, 2018, management concluded that the fair value of
each of the Company's three reporting units that have goodwill were greater than their carrying value as of the testing date;
therefore, goodwill was not impaired and no further impairment testing was required. No goodwill impairment was recorded in
2018, 2017 or 2016.
Goodwill Impairment Test - Result of Segment Reorganization
As discussed in Note 16, ProAssurance reorganized its segment reporting in the third quarter of 2018 to align with how
the Company's CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of
the segment reorganization, ProAssurance added an operating and reportable segment: Segregated Portfolio Cell Reinsurance.
The Segregated Portfolio Cell Reinsurance segment also became a reporting unit for purposes of testing goodwill for
impairment. Management allocated goodwill to the Company's revised reporting units using a relative fair value approach
which resulted in a nominal amount of goodwill reallocated from the Workers' Compensation Insurance reporting unit to the
Segregated Portfolio Cell Reinsurance reporting unit. Management performed a quantitative goodwill impairment assessment
for the Workers' Compensation Insurance reporting unit immediately prior to the reallocation and a quantitative goodwill
impairment assessment for the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units
immediately after the reallocation and determined that no impairment existed.
Management estimated the fair value of the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance
reporting units using both an income approach and market approach using the same valuation methodologies and process for
developing assumptions that management uses in the annual impairment assessment, as discussed above. To corroborate the
reporting units’ valuation, management performed 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. Because management was not
required to estimate the fair value of all of the Company's reporting units as part of this interim goodwill impairment
assessment, management made certain assumptions regarding the fair value of the Company's other reporting units in
reconciling to ProAssurance's market capitalization.
The Specialty P&C reporting unit's net operating results were not impacted by the segment reorganization and there was
no change to the amount of goodwill allocated to that reporting unit. Consequently, a quantitative goodwill impairment
assessment was not required for this reporting unit due to the segment reorganization.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Other Liabilities
Other liabilities at December 31, 2018 and 2017 consisted of the following:
(In thousands)
SPC dividends payable
Unpaid dividends
All other
Total other liabilities
$
2018
53,604
43,446
102,245
2017
$
46,925
267,292
123,383
$ 199,295
$ 437,600
SPC dividends payable are the cumulative undistributed earnings contractually payable to the external participants of
SPCs operated by ProAssurance's Cayman Islands subsidiaries, Eastern Re and Inova Re.
Unpaid dividends represent common stock dividends declared by ProAssurance's Board that had not yet been paid.
Unpaid dividends at both December 31, 2018 and 2017 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, 2018, for recognition or disclosure in its
Consolidated Financial Statements.
Accounting Changes Adopted
Restricted Cash (ASU 2016-18)
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 adopted the guidance as of January 1, 2018. Adoption of the guidance had no
material effect on ProAssurance’s results of operations, financial position or cash flows.
Intra-Entity Transfers of Assets Other than Inventory (ASU 2016-16)
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 adopted the guidance as of January 1, 2018. Adoption of the
guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.
Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)
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 adopted the guidance as of January 1, 2018 and elected to use
the cumulative earnings approach for presenting distributions from equity method investees. Adoption of the guidance had no
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Notes to Consolidated Financial Statements
December 31, 2018
material effect on ProAssurance’s results of operations or financial position; however, ProAssurance reclassified approximately
$24.4 million and $9.9 million in distributions from unconsolidated subsidiaries from investing activities to operating activities
in the Consolidated Statement of Cash Flows for the years ended December 31, 2017 and 2016, respectively.
Revenue from Contracts with Customers (ASU 2014-09)
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 adopted the guidance as of January 1, 2018 under the modified retrospective method.
Adoption of the guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)
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 adopted the guidance as
of January 1, 2018 using a modified retrospective application and recorded a cumulative-effect after-tax adjustment of
approximately $8.3 million to beginning retained earnings in the Consolidated Statement of Changes in Capital for the year
ended December 31, 2018. LPs/LLCs previously reported using the cost method are now reported at fair value with increases in
fair value of approximately $12.8 million recognized as a component of equity in earnings (loss) of unconsolidated subsidiaries
on the Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2018. ProAssurance
received dividends of approximately $22.0 million from these investments during 2018 that was recorded as a reduction in the
carrying value of the investments instead of as a component of net investment income on the Consolidated Statements of
Income and Comprehensive Income for the year ended December 31, 2018.
Modification Accounting for Employee Share-Based Payment Awards (ASU 2017-09)
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 adopted the guidance as of January 1, 2018.
Adoption of the guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.
Reclassification of Certain Tax Effects from AOCI (ASU 2018-02)
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 adopted this guidance as of January 1, 2018 and elected to apply this guidance in the period of adoption using the
specific identification method. Using a modified retrospective application, ProAssurance recorded a cumulative-effect
adjustment which increased beginning AOCI by approximately $3.4 million and decreased beginning retained earnings by the
same amount in the Consolidated Statement of Changes in Capital for the year ended December 31, 2018. Adoption of this
guidance had no material effect on ProAssurance's financial position, results of operations or cash flows.
Technical Corrections and Improvements to Financial Instruments - Overall (ASU 2018-03)
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years beginning after
June 15, 2018, the FASB amended the new standard on recognizing and measuring financial assets and financial liabilities to
clarify certain aspects of the guidance. Under the amended guidance, an entity that uses the measurement alternative for equity
investments without readily determinable fair values can change its measurement approach to a fair value method through an
irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Also, entities
156
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
are required to use the prospective transition approach only for equity investments they elect to measure using the new
measurement alternative. Additionally, the guidance clarifies how to apply the measurement alternative and presentation
requirements for financial liabilities measured under the fair value option. ProAssurance adopted the guidance as of July 1,
2018 and adoption had no material effect on ProAssurance's financial position, results of operations or cash flows as
ProAssurance does not have any equity investments without readily determinable fair values or financial liabilities measured
under the fair value option.
Accounting Changes Not Yet Adopted
Leases (ASU 2016-02)
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 using a prospective application and plans to elect the transition option
provided that allows companies to continue to apply legacy GAAP in comparative periods. Also, ProAssurance plans to elect
the package of practical expedients permitted under the guidance, which allows the Company to carryforward its historical
lease classification, its assessment on whether a contract is or contains a lease and its initial direct costs for any leases that exist
prior to adoption of the new standard. Furthermore, ProAssurance plans to elect to combine lease and non-lease components
and to keep leases with an initial term of 12 months or less off the Consolidated Balance Sheet and recognize the associated
lease payments in the Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease
term. ProAssurance estimates approximately $19 million that would be recognized upon adoption as total right-of-use assets
and total lease liabilities on the Consolidated Balance Sheet as of January 1, 2019 which relate to ProAssurance's real estate
operating leases; the Company does not consider these leases to be material to its financial position. Adoption of this guidance
will have no material impact on ProAssurance's results of operation or cash flows.
ProAssurance's Revolving Credit Agreement contains a financial covenant regarding permitted leverage ratios based upon
Consolidated Funded Indebtedness to Consolidated Total Capitalization; however, adoption of this guidance would have no
material impact on this covenant. ProAssurance’s Mortgage Loans also contain a financial covenant regarding permitted
leverage ratios, principally based upon SAP Consolidated Net Worth; however, as the NAIC is not anticipated to adopt the
principles found in ASU 2016-02, adoption of the guidance would have no impact on this covenant.
Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)
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, financial position or cash flows.
Derivatives and Hedging (ASU 2017-12)
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, 2018 is not designated as a hedging instrument; therefore, adoption is not expected to
have a material effect on ProAssurance's results of operations, financial position or cash flows.
157
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07)
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB
issued guidance which reduces the complexity in accounting for nonemployee share-based payment awards. The new guidance
substantially aligns the accounting for nonemployee share-based payment awards with the accounting guidance for employee
share-based payment awards with certain exceptions, including the inputs used in estimating the fair value of the nonemployee
awards and the period of time and pattern of expense recognition. ProAssurance plans to adopt the guidance as of January 1,
2019. Adoption of the guidance is not expected to have a material effect on ProAssurance’s results of operations, financial
position or cash flows.
Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap as a Benchmark
Interest Rate for Hedge Accounting Purposes (ASU 2018-16)
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB
issued new guidance that permits the use of the Overnight Index Swap Rate based on the Secured Financing Rate as a U.S.
benchmark interest rate for hedge accounting purposes. ProAssurance plans to adopt the guidance beginning January 1, 2019.
ProAssurance's derivative instrument at December 31, 2018 is not designated as a hedging instrument; therefore, adoption is
not expected to have a material effect on ProAssurance's results of operations, financial position or cash flows.
Improvements to Financial Instruments - Credit Losses (ASU 2016-13)
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. Credit losses on available-for-sale fixed maturity securities will be measured in a manner similar to current GAAP,
although the new guidance requires that credit losses be presented as an allowance, rather than as a write-down of the asset,
limited to the amount by which the fair value is below amortized cost. In addition, this guidance could impact ProAssurance's
receivables from reinsurers; however, ProAssurance has not historically experienced material credit losses due to the financial
condition of a reinsurer. ProAssurance plans to adopt the guidance beginning January 1, 2020 and is in the process of evaluating
the effect the new guidance would have on its results of operations and financial position.
Simplifying the Test for Goodwill Impairment (ASU 2017-04)
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, financial position or cash flows.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB
issued guidance that eliminates, modifies and adds certain disclosure requirements related to fair value measurements. The new
guidance eliminates the requirements to disclose the transfers between Level 1 and Level 2 of the fair value hierarchy, the
policy for the timing of transfers between levels of the fair value hierarchy and the valuation process for Level 3 fair value
measurements while it modifies existing disclosure requirements related to measurement uncertainty and the requirement to
disclose the timing of liquidation of an investee's assets for investments in certain entities that calculate NAV. The new guidance
also adds requirements to disclose changes in unrealized gains and losses included in OCI for recurring Level 3 fair value
measurements as well as the range and weighted average used to develop significant unobservable inputs for Level 3 fair value
measurements. An entity is permitted to early adopt any eliminated or modified disclosure requirements and delay adoption of
the additional disclosure requirements until the guidance is effective. As of December 31, 2018, ProAssurance has elected to
early adopt the provisions that eliminate and modify certain disclosure requirements within Note 2 on a retrospective basis and
adoption of these certain provisions had no material effect on ProAssurance’s results of operations, financial position or cash
flows as it affected disclosures only. ProAssurance plans to adopt the additional disclosure requirements beginning January 1,
2020 and adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash
flows.
158
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Intangibles - Goodwill and Other-Internal-Use Software (ASU 2018-15)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB
amended the new standard regarding accounting for implementation costs in cloud computing arrangements. The amended
guidance substantially aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a
service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
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, financial position or cash flows.
Targeted Improvements to Related Party Guidance for VIEs (ASU 2018-17)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB
amended guidance which improves the consistency of the application of the VIE guidance for common control arrangements.
The amended guidance requires an entity to consider indirect interests held through related parties under common control on a
proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making
fee is a variable interest. ProAssurance plans to adopt the guidance beginning January 1, 2020. As of December 31, 2018
ProAssurance does not have any material indirect interests held through related parties under common control; therefore,
adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.
Collaborative Arrangements (ASU 2018-18)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB
issued new guidance which clarifies how to assess whether certain transactions between participants in a collaborative
arrangement should be accounted for under the revenue from contracts with customers accounting standard when the
counterpart is a customer. In addition, the guidance precludes an entity from presenting consideration from a transaction in a
collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction.
ProAssurance plans to adopt the guidance beginning January 1, 2020 and adoption is not expected to have a material effect on
ProAssurance’s results of operations, financial position or cash flows.
159
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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, 2018 and December 31, 2017 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.
160
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
(In thousands)
Level 1
Level 2
Level 3
Fair Value
December 31, 2018
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
Fixed maturities, trading
Equity investments
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
Assets carried at NAV, which approximates fair value and which
are not categorized within the fair value hierarchy, reported as
a part of:
Equity investments
Investment in unconsolidated subsidiaries
Total assets at fair value
$
— $
—
—
2,319
—
—
—
—
—
—
120,201
35,354
293,772
1,216,834
—
181,238
13,108
30,993
191,807
38,188
62,344
46,533
47,462
41,487
174,753
50,066
265,910
—
—
$ 690,874
—
—
—
—
—
—
42,409
31,341
1,884
$ 2,197,129
$
$
120,201
— $
35,354
—
293,772
—
— 1,219,153
4,322
181,238
13,108
30,993
195,657
38,188
4,322
—
—
—
3,850
—
—
—
—
—
—
—
—
3
—
8,175
62,344
46,533
47,462
41,487
174,753
50,066
308,319
31,344
1,884
2,896,178
20,292
268,436
$ 3,184,906
161
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
(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 investments
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
$
Assets carried at NAV, which approximates fair value and which are
not categorized within the fair value hierarchy, reported as a part
of:
Investment in unconsolidated subsidiaries
Other investments
Total assets at fair value
December 31, 2017
Fair Value Measurements Using
Total
Level 1
Level 2
Level 3
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
210,759
20,130
$ 3,447,768
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, 2018 and 2017.
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.
162
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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.
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.
Fixed maturities, trading, are held by the Lloyd's Syndicates segment and include U.S. Treasury obligations, U.S.
Government-sponsored enterprise obligations, corporate debt with multiple observable inputs and other asset-backed securities.
These securities were valued using the respective valuation methodologies discussed above for each security type.
Short-term investments were securities maturing within one year, carried at fair value which approximated the cost of the
securities due to their short-term nature.
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, which is discussed in Note 11, 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 methodologies used as well as quantitative information regarding
securities in the Level 3 category, by security type:
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, 2018, 54% of the
securities were rated and the average rating was BBB+. At December 31, 2017, 84% of the securities were rated and the
average rating was BBB+.
163
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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, 2018, 25% of the securities were rated and the average rating was AAA. At December 31, 2017, 21% of the
securities were rated and the average rating was AAA.
Other investments consisted of convertible securities for which limited observable inputs were available at December 31,
2018 and December 31, 2017. 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,
2018
December 31,
2017
Valuation Technique
Unobservable
Input
Range
(Weighted Average)
Assets:
Corporate debt, limited
observable inputs
$4,322
$13,703
Market Comparable
Securities
Discounted Cash Flows
Residential mortgage-backed
and other asset-backed
securities
$3,850
$4,986
Market Comparable
Securities
Discounted Cash Flows
Other investments
$3
$409
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.
164
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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.
(In thousands)
Balance December 31, 2017
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, 2018
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, 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
$
$
Transfers
December 31, 2018
Level 3 Fair Value Measurements – Assets
Corporate
Debt
13,703
$
Asset-backed
Securities
$
4,986
Other
investments
409
$
Total
19,098
$
(148)
(8)
(233)
8,005
(6,406)
2,627
(13,218)
4,322
$
2
—
(105)
20,093
(438)
—
(20,688)
3,850
$
—
(40)
—
—
(366)
—
—
3
$
(146)
(48)
(338)
28,098
(7,210)
2,627
(33,906)
8,175
— $
— $
— $
—
December 31, 2017
Level 3 Fair Value Measurements – Assets
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
— $
— $
— $
—
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 2018 and 2017 were to or from Level 2.
All transfers during 2018 and 2017 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.
165
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Fair Values Not Categorized
At December 31, 2018 and 2017, certain LPs/LLCs and investment funds measure fund assets at fair value on a recurring
basis and provide a NAV for ProAssurance's interest. The carrying value of these interests is based on the NAV provided and
was considered to approximate the fair value of the interests. For investment in unconsolidated subsidiaries, ProAssurance
recognizes any changes in the NAV of its interests in equity in earnings (loss) of unconsolidated subsidiaries during the period
of change. In accordance with GAAP, the fair value of these investments was not classified within the fair value hierarchy. The
amount of ProAssurance's unfunded commitments related to these investments as of December 31, 2018 and fair values of
these investments as of December 31, 2018 and 2017 was as follows:
(In thousands)
Equity investments:
Mortgage fund (1)*
Investment in unconsolidated subsidiaries:
Private debt funds (2)
Long equity fund (3)
Long/short equity funds (4)
Non-public equity funds (5)
Multi-strategy fund of funds (6)
Credit funds (7)
Long/short commodities fund (8)
Strategy focused funds (9)
Other investments:
Mortgage fund (1)*
Unfunded
Commitments
December 31,
2018
Fair Value
December 31,
2018
December 31,
2017
$
$
$
$
$
— $
20,292
$
—
20,954
None
None
80,076
None
8,916
None
24,539
18,196
6,561
28,805
114,811
9,322
29,164
12,958
48,619
268,436
42,206
7,847
31,352
100,062
9,100
6,561
13,025
606
210,759
See above
—
20,130
Total investments carried at NAV
$
288,728
$
230,889
* In the first quarter of 2018, ProAssurance began presenting this investment previously reported as a part of
other investments as a part of equity investments on the Consolidated Balance Sheet. Prior year amounts
have not been reclassified.
Below is additional information regarding each of the investments listed in the table above as of December 31, 2018.
(1) 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.
(2) This investment is comprised of interests in three 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 two do 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.
(3) This 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.
(4) This 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.
(5) This 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
166
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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.
(6) 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.
(7) This investment is comprised of three unrelated LP funds. Two funds seek to obtain superior risk-adjusted absolute
returns through a diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments.
The remaining fund seeks event driven opportunities across the corporate credit spectrum. Two funds are allowed
redemptions at any quarter-end with a prior notice requirement of 90 days; one fund permits redemption at any
quarter-end with a prior notice requirement of 180 days.
(8) 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.
(9) This investment is comprised of multiple unrelated LPs/LLCs funds. One fund is a LLC focused on investing in
North American consumer products companies, comprised of equity and equity-related securities, as well as debt
instruments. Redemptions are not permitted. Another fund is a LP focused on North American energy infrastructure
assets that allows redemption with consent of the General Partner. The remaining funds are real estate focused LPs,
one of which allows for redemption with prior notice.
ProAssurance may not sell, transfer or assign its interest in any of the above LPs/LLCs without special consent from the
LPs/LLCs.
Nonrecurring Fair Value Measurement
At December 31, 2018, ProAssurance did not have any assets or liabilities that were measured at fair value on a
nonrecurring basis. 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.
167
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Financial Instruments - Methodologies Other Than Fair Value
The following table provides the estimated fair value of ProAssurance's 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, 2018
December 31, 2017
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
64,096
2,943
35,921
$
$
$
64,096
2,943
35,468
$
$
$
250,000
$
— $
$
$
39,064
21,300
264,810
$
— $
$
$
39,064
21,300
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
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 FHLB common stock carried at cost and an annuity investment carried
at amortized cost. 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 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, which is categorized as a Level 1 valuation, and had a fair value of $24.1 million and $20.2 million at December 31,
2018 and 2017, respectively. 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.
168
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
3. Investments
Available-for-sale fixed maturities at December 31, 2018 and December 31, 2017 included the following:
(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
(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
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Estimated Fair
Value
$
121,274
$
331
$
1,404
$
120,201
35,758
289,544
1,244,577
184,463
13,296
31,330
25
4,877
3,328
814
12
38
429
649
24,430
4,039
200
375
35,354
293,772
1,223,475
181,238
13,108
30,993
196,583
$ 2,116,825
$
254
9,679
$
1,180
32,706
195,657
$ 2,093,798
Amortized
Cost
$
134,323
21,089
618,414
1,157,660
196,741
10,827
16,004
102,130
$ 2,257,188
$
$
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
Estimated Fair
Value
$
133,627
20,956
632,243
1,167,158
197,844
10,742
15,961
101,711
$ 2,280,242
169
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
The recorded cost basis and estimated fair value of available-for-sale fixed maturities at December 31, 2018, 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)
Amortized
Cost
Due in one
year or less
Fixed maturities, available for sale
Due after
one year
through
five years
Due after
five years
through
ten years
Due after
ten years
Total Fair
Value
U.S. Treasury obligations
$ 121,274
$
27,187
$
74,196
$
18,416
$
402
$ 120,201
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
35,758
289,544
3,279
10,506
1,244,577
147,223
12,301
126,225
726,570
19,640
129,118
324,467
134
27,923
25,215
35,354
293,772
1,223,475
184,463
13,296
31,330
196,583
$ 2,116,825
181,238
13,108
30,993
195,657
$ 2,093,798
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, 2018.
Cash and securities with a carrying value of $47.1 million at December 31, 2018 were on deposit with various state
insurance departments to meet regulatory requirements.
As a member of Lloyd's and a capital provider to Syndicate 1729 and Syndicate 6131, ProAssurance is required to
maintain capital at Lloyd's, referred to as FAL. ProAssurance's FAL investments at December 31, 2018 included available-for-
sale fixed maturities with a fair value of $123.4 million and short-term investments with a fair value of $19.3 million on deposit
with Lloyd's in order to satisfy these FAL requirements.
170
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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, 2018 and December 31, 2017, including the length of time the investment had been held in a continuous
unrealized loss position.
(In thousands)
Fixed maturities, available for sale
December 31, 2018
Total
Less than 12 months
12 months or longer
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
U.S. Treasury obligations
$
97,969
$
1,405
$
20,221
$
119
$
77,748
$
1,286
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
(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
33,677
63,094
938,651
429
648
24,429
20,479
30,924
447,891
126
143
8,804
13,198
32,170
490,760
303
505
15,625
157,120
4,039
27,311
209
129,809
3,830
9,822
200
4,566
22
5,256
178
22,924
142,470
$ 1,465,727
$
375
1,181
32,706
13,348
70,218
$ 634,958
$
164
236
9,823
9,576
72,252
$ 830,769
$
211
945
22,883
Total
December 31, 2017
Less than 12 months
12 months or longer
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
$ 110,788
$
1,181
$
67,135
$
554
$
43,653
$
627
17,032
23,122
487,578
206
419
5,707
10,182
15,168
365,541
109,659
1,335
64,121
4,423
12,878
85,358
108
134
466
2,458
7,939
70,924
64
102
2,730
402
34
82
346
6,850
7,954
122,037
45,538
1,965
4,939
14,434
142
317
2,977
933
74
52
120
$ 850,838
$
9,556
$ 603,468
$
4,314
$ 247,370
$
5,242
As of December 31, 2018, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were
1,044 debt securities (50.6% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing
550 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.6 million
and $0.5 million, respectively. The securities were evaluated for OTTI as of December 31, 2018.
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.
171
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds
in an unrealized loss position has 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, 2018, 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, 2018 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.
Other information regarding sales and purchases of fixed maturity available-for-sale securities is as follows:
Proceeds from sales (exclusive of maturities and paydowns)
(In millions)
Purchases
Equity Investments
Year Ended December 31
2018
2017
2016
$
$
599.6 $
780.7 $
530.2 $
614.4 $
361.8
636.4
ProAssurance's equity investments are carried at fair value with changes in fair value recognized in income as a
component of net realized investment gains (losses) during the period of change. Equity investments on the Consolidated
Balance Sheet as of December 31, 2018 primarily included stocks, bonds and investment funds.
Short-term Investments
ProAssurance's 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. Short-term investments are carried at fair
value which approximates the cost of the securities due to their short-term nature.
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.
Net Investment Income
Net investment income by investment category was as follows:
(In thousands)
2018
2017
2016
Year Ended December 31
Fixed maturities
Equities
Short-term investments, including Other
BOLI
Investment fees and expenses
Net investment income
$
69,515
$
75,669
$
21,418
5,649
1,983
(6,681)
91,884
$
17,198
7,793
1,979
(6,977)
95,662
$
$
85,818
14,887
3,402
2,008
(6,103)
100,012
172
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Investment in Unconsolidated Subsidiaries
ProAssurance's investment in unconsolidated subsidiaries were as follows:
(In thousands)
Qualified affordable housing project tax credit
partnerships
Other tax credit partnerships
All other investments, primarily investment
fund LPs/LLCs
December 31, 2018
Carrying Value
Percentage
Ownership
December 31,
2018
December 31,
2017
See below
See below
$
65,677
$
3,757
See below
298,323
$
367,757
$
84,607
6,118
239,866
330,591
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 $25.0 million and $32.5 million at December 31, 2018 and 2017, respectively. ProAssurance's ownership
percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of
$40.7 million and $52.1 million at December 31, 2018 and 2017, respectively. 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 14.
Other tax credit partnerships are comprised entirely of investments in historic tax credit partnerships. The historic tax
credit partnerships 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 historic 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 14.
ProAssurance holds interests in investment fund LPs/LLCs and other equity method investments and LPs/LLCs which are
not considered to be investment funds. ProAssurance's ownership percentage relative to one 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 $25.9 million at December 31, 2018 and $30.8 million at December 31, 2017. ProAssurance's ownership
percentage relative to the remaining investments and LPs/LLCs is less than 25%; these interests had a carrying value of $272.4
million at December 31, 2018 and $209.1 million at December 31, 2017. ProAssurance does not have the ability to exert
control over any of these funds.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax
credit partnerships and historic tax credit partnerships. Losses recorded reflect ProAssurance's allocable portion of partnership
operating losses. Tax credits reduce income tax expense in the period they are recognized. Losses recorded and tax credits
recognized related to ProAssurance's tax credit partnership investments were as follows:
(In thousands)
2018
2017
2016
Year Ended December 31
Qualified affordable housing project tax credit
partnerships
Losses recorded
Tax credits recognized
Historic tax credit partnerships
Losses recorded
Tax credits recognized
$
$
$
$
18,889
18,474
5,434
2,567
$
$
$
$
14,297
17,774
6,355
5,337
$
$
$
$
20,047
18,531
4,771
9,018
173
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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 fixed maturities
Gross realized (losses), available-for-sale fixed maturities
Net realized gains (losses), short-term investments
Net realized gains (losses), trading fixed maturities
Net realized gains (losses), equity investments
Net realized gains (losses), other investments
Change in unrealized holding gains (losses), trading fixed maturities
Change in unrealized holding gains (losses), equity investments
Change in unrealized holding gains (losses), convertible securities,
carried at fair value
Other
Net realized investment gains (losses)
Year Ended December 31
2018
2017
2016
$
— $
(490)
—
—
—
(490)
5,942
(5,799)
(1)
(100)
12,230
1,340
(317)
(52,707)
(3,849)
263
$ (43,488) $
(850) $
(419)
(11,931)
—
(100)
(7,604)
—
(3,130)
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
896
7
16,409
$
899
7
34,875
During 2018, ProAssurance recognized OTTI in earnings of $0.5 million related to debt instruments from two issuers in
the energy sector.
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.
174
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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.
Balance beginning of period
(In thousands)
2018
2017
2016
$
1,313
$
1,158
$
5,751
Additional credit losses recognized during the period, related to
securities for which:
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
(1,220)
93
$
$
(16)
1,313
$
(9,145)
1,158
175
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
4. Retroactive Insurance Contracts
ProAssurance offers custom alternative risk solutions including loss portfolio transfers for large healthcare entities who,
most commonly, are exiting a line of business, changing an insurance approach or simply preferring to transfer risk. A loss
portfolio transfer is a form of retroactive insurance coverage as the Company is assuming and accepting an entity’s existing
open and future claim liabilities through the transfer of the entity’s loss reserves.
In the second quarter of 2018, ProAssurance entered into a loss portfolio transfer with a large healthcare organization. Per
the agreement, ProAssurance will cover a specific inventory of existing claims as well as provide tail coverage. As the contract
included both prospective (tail) coverage and retroactive coverage, ProAssurance bifurcated the provisions of the contract and
accounted for each component separately. As of the contract effective date, ProAssurance recognized total net premiums written
and earned of $26.6 million, comprised of $7.9 million of prospective coverage and $18.7 million of retroactive coverage, and
total net losses and loss adjustment expenses of $25.4 million in the Consolidated Statements of Income and Comprehensive
Income for the year ended December 31, 2018. In addition, ProAssurance recorded a deferred gain of $0.6 million in the
reserve for losses and loss adjustment expenses in the second quarter of 2018 representing the excess of premiums received
over losses assumed related to the retroactive coverage which is amortized into earnings over the estimated claim payment
period. ProAssurance recognized a nominal amount of amortization related to this deferred gain during the year ended
December 31, 2018. For additional information regarding ProAssurance's accounting policy for retroactive insurance contracts,
see Note 1.
5. 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, 2018, 2017 and 2016 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
2018
910,198
47,113
(122,397)
834,914
903,354
41,535
(126,036)
818,853
675,784
(82,574)
593,210
$
$
$
$
$
$
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
The receivable from reinsurers on unpaid losses and LAE represents management’s estimated amount of future loss
payments 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. Due to
changes in management’s estimates of amounts due to reinsurers related to prior accident year loss recoveries, ProAssurance
increased premiums ceded by $5.5 million during the year ended December 31, 2018 and reduced premiums ceded by $1.2
million and $7.1 million during the years ended December 31, 2017 and 2016, respectively.
176
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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, 2018, the net total amounts due from reinsurers was $340.4 million (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 $36.0 million.
At December 31, 2018 reinsurance recoverables totaling approximately $77.1 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,
2018 or 2017 as all reinsurance balances were considered collectible. During the years ended December 31, 2018 and 2016, no
reinsurance balances were written off for credit reasons. During the year ended December 31, 2017, reinsurance balances
written off for credit reasons were nominal in amount.
During 2018, 2017 and 2016, ProAssurance commuted the 2016, 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 $6.1 million, $6.3 million and $6.8 million, respectively. The commutations reduced the receivable from
reinsurers on unpaid losses and LAE, combined, by approximately $6.7 million, $6.6 million and $7.1 million during the years
ended December 31, 2018, 2017 and 2016, respectively.
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
LAE by approximately $5.4 million.
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.
177
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
6. 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:
(In thousands)
Deferred tax assets
Unpaid loss discount
Unearned premium adjustment
Compensation related
Unrealized losses on investments, net
Basis differentials–investments
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
Unpaid loss discount–transition
Unrealized gains on investments, net
Fixed assets
Basis differentials–investments
Intangibles
Other
December 31
2018
2017
$
30,629
$
16,620
9,879
4,403
912
433
6,795
69,671
(7,074)
62,597
(9,972)
(10,128)
—
(542)
—
(11,243)
(1,604)
(33,489)
29,108
$
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
Total deferred tax liabilities
Net deferred tax assets (liabilities)
$
ProAssurance had $34.0 million of available NOL carryforwards at December 31, 2018 related to the Company's U.K.
operations which may be carried forward indefinitely. At December 31, 2018 and 2017, ProAssurance established a deferred tax
asset related to the NOL carryforwards of $6.8 million and $4.1 million, respectively. In 2018 and 2017, management evaluated
the realizability of the deferred tax asset related to the U.K. 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 related to the U.K. NOL carryforwards in both 2018 and 2017. The increase in the deferred tax asset related
to the U.K. NOL carryforwards and the related valuation allowance in 2018 as compared to 2017 of $2.7 million was primarily
due to natural catastrophe-related losses recognized in the Lloyd's Syndicates segment during 2018 related to Hurricanes
Michael and Florence as well as volcanic eruptions in Hawaii.
During 2018, the Company restructured its Cayman Islands operations which resulted in the formation of a new
subsidiary, Inova Re. Our deferred tax assets and liabilities include those of the SPCs at Inova Re, net of a valuation allowance
of $0.3 million at December 31, 2018. Due to the limited operations of these newly formed SPCs as of December 31, 2018,
management concluded that a valuation allowance was required.
ProAssurance had no available capital loss carryforwards or Alternative Minimum Tax credit carryforwards as of
December 31, 2018.
ProAssurance files income tax returns in various states, the U.S. federal jurisdiction and the U.K. ProAssurance had a
receivable for U.S. federal and U.K. income taxes of $3.5 million at December 31, 2018, carried as a part of other assets. At
December 31, 2017, ProAssurance had a liability for U.S. federal and U.K. income taxes of $8.0 million, carried as a part other
liabilities.
The statute of limitations is now closed for all tax years prior to 2015.
178
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2018, 2017 and 2016, were as
follows:
(In thousands)
2018
2017
2016
Balance at January 1
Increases for tax positions taken during the current year
(Decreases) for tax positions taken during the current year
(Decreases)/increases for tax positions taken during prior years
(Decreases) relating to a lapse of the applicable statute of
limitations
Balance at December 31
$
$
5,341
—
(777)
(800)
$
8,353
$
—
(3,500)
700
(163)
3,601
$
(212)
5,341
$
8,195
361
—
—
(203)
8,353
At December 31, 2018 and 2017, approximately $1.2 million and $1.3 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, 2018 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 nominal for the year ended December 31, 2018 and was approximately $0.3 million
and $0.2 million for the years ended December 31, 2017 and 2016, respectively. The accrued liability for interest was
approximately $0.6 million at December 31, 2018 and $0.5 million at December 31, 2017.
Income tax expense (benefit) for each of the years ended December 31, 2018, 2017 and 2016 consisted of the following:
(In thousands)
2018
2017
2016
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)
Total income tax expense (benefit)
$
$
(6,509) $
301
(6,208)
(11,765)
(59)
(11,824)
(18,032) $
19,546
120
19,666
1,331
362
1,693
21,359
$
$
15,857
729
16,586
8,284
250
8,534
25,120
179
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
A reconciliation of “expected” income tax expense (benefit) (21% of income before income taxes for 2018; 35% of
income before income taxes for 2017 and 2016) to actual income tax expense (benefit) for each of the years ended
December 31, 2018, 2017 and 2016 were as follows:
(In thousands)
2018
2017
2016
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
Provision-to-return differences
Other
Total income tax expense (benefit)
$
$
6,095
(2,505)
(21,059)
2,269
(275)
—
—
(2,309)
(248)
(18,032) $
$
45,018
(8,356)
(23,111)
918
(2,762)
6,541
3,497
(1,979)
1,593
61,670
(9,917)
(27,549)
(1,688)
—
—
—
1,209
1,395
21,359
$
25,120
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 change in how property and casualty
taxpayers discount loss reserves, a minimum tax on payments made to related foreign entities and a new tax on certain income
of controlled foreign corporations.
Effective January 1, 2018, the TCJA introduced 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 for which a deduction is
allowed. Premiums the Company cedes to the SPCs at its newly formed wholly owned Cayman Islands reinsurance subsidiary,
Inova Re, do not fall within the scope of base erosion payments as the SPCs at Inova Re intend to elect to be taxed as U.S.
taxpayers. However, premiums the Company cedes to any active SPC at its 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. See further discussion on the Company’s new subsidiary, Inova Re, and its Cayman Islands SPC operations in Note 16.
Management has evaluated its exposure to the BEAT and has concluded that the Company’s expected outbound deductible
payments to related foreign entities are below the threshold for application of the BEAT; therefore, ProAssurance has not
recognized any incremental tax expense for the BEAT provision of the TCJA for the year ended December 31, 2018.
The TCJA also requires a U.S. shareholder of a controlled foreign corporation to include its GILTI in U.S. taxable income.
The GILTI amount is based on the U.S. shareholder’s aggregate share of the gross income of the controlled foreign corporation
reduced by certain exceptions and a net deemed tangible income return. The net deemed tangible income return is based on the
controlled foreign corporation’s basis in the tangible depreciable business property. Cell rental fee income earned by Inova Re
and Eastern Re fall within the scope of the GILTI provisions of the TCJA. Management has evaluated the new GILTI
provisions of the TCJA and has made an accounting policy election to treat the taxes due on inclusions of GILTI in U.S. taxable
income as a current period expense when incurred.
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 provided a framework for companies to account for uncertainties in applying the provisions of
the TCJA. SAB 118 allowed companies to record a provisional amount in situations where a company did not have the
necessary information available but could make a reasonable estimate. In situations where companies could not make a
reasonable estimate due to various factors, including lack of information, a provisional amount was not recorded. Instead,
companies continued 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, began on the
enactment date of the TCJA and ended when a company obtained, prepared and analyzed the information that was needed in
180
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
order to complete the accounting requirements under current accounting guidance. However, under no circumstances would 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 its accounting for all areas of the TCJA during
the period of enactment and recognized a charge of $6.5 million, which was included as a component of income tax expense
from continuing operations for the year ended December 31, 2017.
Provisional amount finalized during the third quarter of 2018
The TCJA placed limitations on the future deductibility of certain executive compensation. At December 31, 2017, the
IRS had not yet issued guidance in this area, and thus ProAssurance made a reasonable estimate of the effects on its existing
deferred tax balances related to executive compensation at that time and recorded a provisional charge of $3.5 million to
income tax expense from continuing operations for the year ended December 31, 2017.
During the third quarter of 2018, the IRS issued guidance addressing the effects of the TCJA on executive compensation;
therefore, ProAssurance was able to complete its accounting for the impact of the TCJA on its December 31, 2017 deferred tax
balances related to executive compensation. As a result, ProAssurance did not record any measurement-period adjustments to
the previously recorded provisional amount.
Provisional amounts finalized during the fourth quarter of 2018
In computing taxable income, property and casualty insurance companies reduce their premiums earned by losses
incurred. The tax deduction for losses incurred is discounted using interest rates and factors prescribed by the IRS. The TCJA
modified the rules for discounting losses incurred by changing the definition of the applicable interest rate that is used and
amending the time periods for the loss payment pattern. These new provisions are effective for tax years beginning after
December 31, 2017 and are subject to a transition rule.
At December 31, 2017, the IRS had not yet released the information necessary for the Company to determine a reasonable
estimate for the tax effects of the TCJA on its deferred tax balances related to loss reserve discounting; therefore, no provisional
amount was recorded at that time. During the fourth quarter of 2018, ProAssurance was able to complete its analysis during the
measurement period following the release of new discount factors by the IRS on December 19, 2018. ProAssurance used the
new discount factors to determine the impact of the TCJA on its deferred tax balances related to loss reserve discounting. The
adjustment, which is referred to as the transition rule adjustment, will be reflected as a component of taxable income evenly
over eight years beginning in 2018. This transition rule adjustment is a taxable temporary difference and has no impact on total
tax expense for the current year. The ultimate impact of the TCJA on the Company's deferred tax balances for loss reserve
discounting could differ, perhaps materially, if the IRS publishes any future revisions to the loss discount factors used in its
analysis.
7. 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 $104.5 million, $95.8 million and $88.4 million for the years ended December 31, 2018,
2017 and 2016, respectively.
181
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
8. 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. For a high proportion of the risks insured or reinsured by ProAssurance, 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 over 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 in both the Workers' Compensation Insurance and Segregated Portfolio
Cell Reinsurance segments, 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
182
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
assumptions in the reserve estimation process and are based on ProAssurance’s historical reported and paid loss development
patterns. As accident years mature, the various actuarial methodologies produce more consistent loss estimates.
For the Lloyd’s Syndicates segment business, given the immaturity of Syndicate 1729 and Syndicate 6131’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 loss experience becomes
more credible from a statistical perspective, 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:
(In thousands)
Balance, beginning of year
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
2018
2,048,381
$
2017
2016
$
1,993,428
$
2,005,326
335,585
1,712,796
273,475
1,719,953
249,350
1,755,976
685,326
603,518
587,007
(92,116)
593,210
(134,360)
469,158
(143,778)
443,229
(117,268)
(412,711)
(529,979)
1,776,027
(106,633)
(369,682)
(476,315)
1,712,796
(96,190)
(383,062)
(479,252)
1,719,953
Plus reinsurance recoverables on unpaid losses and loss
adjustment expenses
Balance, end of year
343,820
335,585
273,475
$
2,119,847
$
2,048,381
$
1,993,428
* Current year net losses in 2018 included incurred losses of $25.4 million related to a loss portfolio transfer entered into
during the second quarter of 2018 (see Note 4).
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 2018 primarily
reflected a lower than anticipated claims severity trend (i.e. the average size of a claim) for accident years 2011 through 2014.
The favorable development recognized in 2017 and 2016 was primarily due to lower than anticipated claims severity trends for
accident years 2010 through 2014 and accident years 2009 through 2013 , respectively.
183
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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
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 insurance reserve, segregated portfolio cell reinsurance - workers' compensation
reserve, Syndicate 1729 casualty reserve, Syndicate 1729 property insurance reserve and Syndicate 1729 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 reserves in the Workers' Compensation Insurance and the Segregated Portfolio Cell Reinsurance
segment are each 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. The small amount of HCPL reserves in the Segregated Portfolio Cell
Reinsurance segment are included in other short-duration lines.
Finally, claims arising from the Company's involvement in Syndicate 1729 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 Syndicate 1729. The small amount of reserves associated with Syndicate 6131 related to
contingency and special property business are included in other short-duration lines.
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 insurance and segregated portfolio cell
workers' compensation reinsurance lines of business, virtually all other acquired entities are captured within the HCPL line of
business.
All information prior to 2018 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.
184
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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 HCPL business has approximated 90% for recent years, which is
higher than the underlying expected loss ratio due to provisions for loss volatility. Changes in observed claim frequency,
severity or a combination of the two can result in variations in loss provisions. The reasons for the variability in loss provisions
from period to period have included additional loss activity within ProAssurance’s excess and surplus lines business, provisions
for losses in excess of policy limits, adjustments to ULAE, 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.
Healthcare Professional Liability Claims-Made
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year Ended December 31,
Unaudited
$ 379,259 $ 370,642 $ 345,714 $ 320,368 $ 284,511 $ 265,478 $ 246,146 $ 230,849 $ 224,768 $
220,703
— $ 364,996 $ 354,787 $ 338,170 $ 312,813 $ 291,553 $ 279,713 $ 270,484 $ 258,466
257,714
IBNR*
$
$
(455)
(243)
— $ 348,916 $ 344,808 $ 331,884 $ 305,540 $ 289,400 $ 278,258 $ 264,777
254,329
$ (2,091)
— $ 341,289 $ 324,418 $ 319,613 $ 306,956 $ 291,075 $ 279,589
— $ 315,346 $ 304,209 $ 296,550 $ 287,140 $ 272,364
271,110
258,251
$
$
276
173
—
—
—
—
—
— $ 290,020 $ 289,397 $ 280,043 $ 267,442
256,968
$ (5,200)
—
—
—
—
— $ 276,492 $ 269,980 $ 271,138
270,814
$ (8,030)
—
—
—
— $ 271,765 $ 274,643
287,551
$ (21,456)
—
—
— $ 283,746
295,883
$ (11,228)
—
—
320,772
$ 129,334
$ 2,694,095
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cumulative
Number of
Reported
Claims
3,828
3,847
3,532
3,702
3,783
3,320
3,266
3,481
3,677
3,558
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
$ 15,051 $ 71,272 $ 114,318 $ 153,563 $ 178,445 $ 191,420 $ 200,425 $ 205,372 $ 209,016 $
213,568
— $ 15,464 $ 69,551 $ 137,712 $ 180,432 $ 209,777 $ 221,693 $ 236,171 $ 240,945
—
—
—
—
—
—
—
—
— $ 14,417 $ 71,208 $ 133,004 $ 177,089 $ 198,112 $ 214,502 $ 224,982
—
—
—
—
—
—
—
— $ 15,382 $ 73,571 $ 145,488 $ 190,997 $ 215,220 $ 231,652
—
—
—
—
—
—
— $ 16,938 $ 69,657 $ 127,496 $ 171,681 $ 197,265
—
—
—
—
—
— $ 16,764 $ 59,485 $ 116,791 $ 154,236
—
—
—
—
— $
9,172 $ 55,731 $ 111,741
—
—
—
— $
9,027 $ 51,869
—
—
— $ 16,309
—
—
243,675
233,103
244,512
213,879
186,239
161,896
109,756
63,171
14,051
1,683,850
11,724
$ 1,021,969
All outstanding liabilities before 2009, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
185
($ in thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
(In thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Healthcare Professional Liability Occurrence
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2018
($ in thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
$ 34,450 $ 35,366 $ 36,802 $ 37,437 $ 34,099 $ 32,675 $ 28,731 $ 26,340 $ 24,572 $
23,387
$ 1,519
— $ 41,721 $ 43,238 $ 43,195 $ 42,233 $ 37,920 $ 35,831 $ 33,361 $ 29,338
26,501
$
946
—
—
—
—
—
—
—
—
— $ 45,882 $ 44,956 $ 41,453 $ 39,917 $ 37,150 $ 35,004 $ 32,343
29,784
$ 2,136
—
—
—
—
—
—
—
— $ 45,703 $ 46,513 $ 44,848 $ 40,692 $ 34,774 $ 32,691
29,857
$ 3,816
—
—
—
—
—
—
— $ 32,746 $ 36,602 $ 35,624 $ 34,393 $ 30,906
26,919
$
971
—
—
—
—
—
— $ 30,420 $ 29,918 $ 32,143 $ 29,869
25,885
$ 2,778
—
—
—
—
— $ 35,648 $ 35,347 $ 37,346
40,960
$ 4,667
—
—
—
— $ 29,609 $ 28,790
27,240
$ 6,244
—
—
— $ 24,571
23,760
$ 19,890
—
—
38,420
$ 36,196
246
290
342
399
356
355
355
322
270
118
$
292,713
* Includes expected development on reported claims
(In thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
$
175 $
2,255 $
5,067 $
7,947 $ 10,823 $ 13,248 $ 15,380 $ 16,025 $ 16,270 $
17,022
— $
285 $
1,881 $
5,647 $
9,120 $ 15,147 $ 21,837 $ 22,804 $ 23,313
— $
291 $
2,803 $
8,059 $ 16,544 $ 19,197 $ 21,416 $ 23,194
— $
363 $
2,430 $
7,705 $ 12,212 $ 19,275 $ 21,435
23,832
24,539
23,095
18,949
14,604
11,626
2,883
—
—
—
—
—
—
—
—
—
—
—
— $
369 $
3,170 $
7,826 $ 14,753 $ 16,787
— $
394 $
2,260 $
7,460 $ 10,519
— $
(350) $
786 $
4,854
— $
(182) $
(195)
—
—
—
—
—
—
—
—
—
— $ (6,809)
(5,858)
—
—
65
130,757
7,985
$
169,941
All outstanding liabilities before 2009, 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
7
8
9
10
Unaudited
Healthcare Professional Liability Claims-Made
5.4%
19.5% 22.8% 17.0% 10.4%
5.9%
Healthcare Professional Liability Occurrence
(2.3%)
6.1%
15.0% 17.6% 15.2% 11.7%
4.6%
6.1%
2.4%
3.1%
1.4%
1.5%
2.1%
3.2%
186
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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, 2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year Ended December 31,
Unaudited
$ 30,462 $ 31,183 $ 27,523 $ 26,181 $ 23,425 $ 21,733 $ 20,551 $ 19,264 $ 18,176 $
17,984
— $ 26,077 $ 27,063 $ 25,175 $ 23,307 $ 19,315 $ 17,439 $ 16,047 $ 16,878
18,611
— $ 17,249 $ 20,930 $ 19,166 $ 15,836 $ 13,794 $ 12,487 $ 12,358
— $ 11,162 $
9,989 $
8,906 $
7,441 $
5,824 $
4,797
— $
9,807 $
9,955 $
9,536 $
7,226 $
4,697
IBNR*
$
$
$
$
$
251
402
500
732
380
8,202
5,051
3,566
—
—
—
—
—
— $
9,989 $ 10,306 $
9,012 $
8,984
7,679
$ 2,544
—
—
—
—
— $
9,376 $
8,757 $
7,193
5,929
$ 2,770
—
—
—
— $
9,200 $
8,467
7,413
$ 3,482
—
—
— $ 11,049
10,143
$ 7,834
—
—
10,141
$ 9,818
$
94,719
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
* Includes expected development on reported claims
Cumulative
Number of
Reported
Claims
699
498
521
220
218
272
155
180
95
188
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
$
116 $
5,071 $
7,742 $ 14,675 $ 14,933 $ 15,097 $ 15,184 $ 15,186 $ 16,515 $
17,522
— $
485 $
3,557 $
8,491 $ 12,283 $ 11,725 $ 12,146 $ 12,253 $ 15,366
17,660
—
—
—
—
—
—
—
—
— $
118 $
2,034 $
3,846 $
5,062 $
7,376 $
7,240 $
7,799
—
—
—
—
—
—
—
— $
568 $
1,520 $
2,805 $
3,247 $
3,366 $
3,676
—
—
—
—
—
—
— $
102 $
1,029 $
1,967 $
2,599 $
3,092
—
—
—
—
—
— $
388 $
1,527 $
2,564 $
3,046
—
—
—
—
— $
—
—
—
25 $
— $
—
—
440 $
1,625
53 $
1,690
— $
—
56
—
7,664
3,800
3,102
3,724
2,097
2,365
1,681
6
59,621
1,101
All outstanding liabilities before 2009, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
36,199
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
2.6% 19.1% 19.7% 16.4%
8.6%
1.6%
2.6%
5.0%
9.9%
5.6%
187
($ in thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
(In thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Workers' Compensation Insurance Reserve
Many factors affect the ultimate losses incurred for the workers' compensation coverages in the Workers' Compensation
Insurance segment 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 Insurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year Ended December 31,
$ 45,354 $ 45,354 $ 45,354 $ 45,354 $ 47,811 $ 48,372 $ 47,905 $ 47,480 $ 47,480 $
— $ 55,852 $ 55,852 $ 55,852 $ 54,837 $ 54,779 $ 55,200 $ 54,600 $ 54,600
Unaudited
— $ 65,665 $ 65,783 $ 71,521 $ 72,280 $ 72,420 $ 72,495 $ 72,795
— $ 80,285 $ 76,551 $ 75,848 $ 76,357 $ 75,836 $ 75,636
— $ 86,973 $ 85,935 $ 86,928 $ 88,010 $ 88,810
— $ 93,019 $ 93,529 $ 93,029 $ 92,229
— $ 100,101 $ 100,454 $ 98,454
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 101,348 $ 97,348
92,148
$ 13,540
—
—
— $ 99,874
99,874
$ 12,489
—
—
118,095
$ 32,816
$
838,821
IBNR*
$
$
$
$
$
$
$
80
58
354
724
1,017
3,350
8,522
47,480
54,600
72,795
75,136
88,810
92,229
97,654
Cumulative
Number of
Reported
Claims
10,129
12,913
15,244
16,204
16,429
16,210
16,548
15,972
16,058
17,556
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
$ 14,701 $ 31,465 $ 39,351 $ 43,436 $ 45,689 $ 46,321 $ 46,928 $ 47,012 $ 47,089 $
47,189
— $ 20,086 $ 39,098 $ 46,762 $ 51,117 $ 52,530 $ 53,443 $ 53,734 $ 53,974
—
—
—
—
—
—
—
—
— $ 21,993 $ 50,900 $ 62,307 $ 67,945 $ 70,146 $ 70,934 $ 71,662
—
—
—
—
—
—
—
— $ 27,448 $ 56,122 $ 65,908 $ 70,558 $ 72,766 $ 73,662
—
—
—
—
—
—
— $ 30,554 $ 63,825 $ 76,813 $ 82,369 $ 85,689
—
—
—
—
—
— $ 30,368 $ 65,922 $ 77,631 $ 85,022
—
—
—
—
— $ 32,078 $ 65,070 $ 78,947
—
—
—
— $ 28,377 $ 58,192
—
—
— $ 31,586
—
—
54,014
71,856
73,676
86,783
87,314
83,483
69,237
70,333
41,619
685,504
2,208
$
155,525
All outstanding liabilities before 2009, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
($ in thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
(In thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
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 Insurance
33.2% 36.5% 14.1%
7.1%
3.3%
1.3%
0.7%
0.3%
0.1%
0.2%
188
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Segregated Portfolio Cell Reinsurance - Workers' Compensation Reserve
The Company estimates and reserves for the workers' compensation business assumed by the Segregated Portfolio Cell
Reinsurance segment in the same manner as for its workers' compensation business in the Workers' Compensation Insurance
segment, as previously discussed.
Segregated Portfolio Cell Reinsurance - Workers' Compensation
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2018
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Year Ended December 31,
$ 17,790 $ 16,337 $ 15,886 $ 15,948 $ 15,809 $ 15,695 $ 15,618 $ 15,277 $ 15,277 $
— $ 19,767 $ 18,265 $ 17,715 $ 17,825 $ 17,736 $ 17,541 $ 17,320 $ 17,278
Unaudited
— $ 18,790 $ 19,360 $ 19,629 $ 19,282 $ 18,644 $ 18,725 $ 18,666
— $ 22,940 $ 21,513 $ 21,048 $ 20,028 $ 19,972 $ 19,864
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 23,809 $ 25,310 $ 26,758 $ 26,619 $ 26,260
— $ 28,248 $ 28,423 $ 29,000 $ 28,373
—
—
—
—
— $ 36,423 $ 32,519 $ 28,746
—
—
—
— $ 37,601 $ 34,055
— $ 42,725
—
—
—
—
43,654
$ 18,788
$
266,016
IBNR*
$
$
$
$
$
$
$
$
$
107
275
363
441
544
942
1,601
2,528
7,314
15,279
17,224
18,606
19,799
26,033
28,281
27,548
30,998
38,594
Cumulative
Number of
Reported
Claims
2,962
2,914
3,154
3,454
3,723
4,433
4,949
5,326
5,699
6,228
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Unaudited
$ 5,000 $ 10,782 $ 13,202 $ 14,660 $ 14,881 $ 14,954 $ 15,147 $ 15,165 $ 15,166 $
15,172
— $
6,503 $ 12,904 $ 15,087 $ 16,214 $ 16,757 $ 16,842 $ 16,810 $ 16,850
—
—
—
—
—
—
—
—
— $
5,940 $ 14,045 $ 17,197 $ 17,869 $ 18,054 $ 18,177 $ 18,176
—
—
—
—
—
—
—
— $
7,808 $ 14,740 $ 17,728 $ 18,474 $ 19,208 $ 19,402
—
—
—
—
—
—
— $
8,131 $ 19,054 $ 24,268 $ 25,209 $ 25,366
—
—
—
—
—
— $
9,933 $ 21,880 $ 26,173 $ 26,810
—
—
—
—
— $ 11,257 $ 21,706 $ 23,977
—
—
—
— $ 10,980 $ 23,003
—
—
— $ 12,404
—
—
16,904
18,185
19,328
25,489
26,959
24,781
26,285
24,791
12,517
210,411
912
$
56,517
All outstanding liabilities before 2009, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
($ in thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
(In thousands)
Accident Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Unaudited
Segregated Portfolio Cell Reinsurance - Workers'
Compensation
34.5% 38.5% 14.3%
4.6%
1.7%
0.6%
0.2%
0.1%
0.2%
—%
189
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Syndicate 1729 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 Syndicates 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 Syndicate 1729 Casualty and Syndicate 1729 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 will not reconcile to previously-issued financial statements which used existing exchange rates at
the date of the financial statement.
Syndicate 1729 Casualty
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2018
($ in thousands)
Accident Year
2014
2015
Year Ended December 31,
2016
Unaudited
2017
2018
2014
2015
2016
2017
2018
Total
$
6,110 $
— $
—
—
—
5,812 $
14,810 $
— $
—
—
5,610 $
14,510 $
19,535 $
— $
—
5,547 $
14,398
19,669
22,069
—
$
$
$
$
$
$
5,472
14,232
19,552
21,824
18,688
79,768
Cumulative
Number of
Reported
Claims(2)
nm
nm
nm
nm
nm
IBNR(1)
1,086
1,984
5,098
9,960
16,014
(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
Year Ended December 31,
2016
Unaudited
2017
2018
$
2014
2015
2016
2017
2018
Total
20 $
— $
—
—
—
474 $
724 $
— $
—
—
4,092 $
6,307 $
2,495 $
— $
—
4,214 $
10,313
8,441
2,611
—
All outstanding liabilities before 2014, net of reinsurance
4,320
10,947
12,869
8,301
1,852
38,289
—
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
41,479
190
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Syndicate 1729 Property Insurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2018
$
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
Total
2014
2015
2016
2017
2018
Year Ended December 31,
890 $
— $
—
—
—
Unaudited
1,089 $
5,519 $
888 $
5,917 $
— $
11,896 $
—
—
— $
—
864 $
6,194
12,984
15,018
—
$
$
$
$
$
$
866
6,159
12,823
17,634
20,636
58,118
Cumulative
Number of
Reported
Claims
IBNR*
(6)
1,128
12
(883)
6,898
118
921
2,484
4,240
3,681
* 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
2018
Total
2014
2015
2016
2017
2018
Year Ended December 31,
267 $
— $
—
—
—
Unaudited
1,005 $
3,165 $
— $
—
—
836 $
4,022 $
7,751 $
— $
—
854 $
4,808
10,939
8,221
—
857
4,869
12,343
16,439
9,918
44,426
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
13,692
191
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Syndicate 1729 Property Reinsurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2018
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
Total
Year Ended December 31,
2014
2015
2016
2017
2018
$
831 $
$
Unaudited
929 $
2,788 $
$
989 $
2,825 $
4,497 $
$
989 $
2,275
4,050
6,861
Cumulative
Number of
Reported
Claims (2)
IBNR(1)
1,125
2,328
3,368
7,832
8,840
$
$
$
$
$
—
(91)
943
371
8,154
nm
nm
nm
nm
nm
$
23,493
(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
2018
Total
Year Ended December 31,
2014
2015
2016
2017
2018
79 $
— $
—
—
—
Unaudited
917 $
1,313 $
— $
—
—
984 $
1,804 $
613 $
— $
—
984 $
1,996
1,667
4,147
—
1,125
2,234
2,136
7,300
547
13,342
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
10,151
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Syndicate 1729 Casualty
Syndicate 1729 Property Insurance
Syndicate 1729 Property Reinsurance
18.7% 40.3% 22.6% 12.8%
81.4% 15.9%
82.0% 13.3%
2.1%
2.8%
0.2%
1.1%
Unaudited
3.2%
0.2%
0.4%
1.1%
0.1%
0.2%
1.0%
0.1%
0.1%
0.4%
0.1%
—%
—%
—%
—%
—%
—%
—%
192
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Below is a reconciliation of the claims development information to the Consolidated Balance Sheet:
(In thousands)
December 31, 2018
Net outstanding liabilities
Healthcare professional liability claims-made
Healthcare professional liability occurrence
Medical technology liability claims-made
Workers' compensation insurance
Segregated portfolio cell reinsurance - workers' compensation
Syndicate 1729 casualty
Syndicate 1729 property insurance
Syndicate 1729 property reinsurance
Other short-duration lines
$
1,021,969
169,941
36,199
155,525
56,517
41,479
13,692
10,151
91,365
Liabilities for losses and loss adjustment expenses, net of reinsurance
1,596,838
Reinsurance recoverable on unpaid losses
Healthcare professional liability claims-made
Healthcare professional liability occurrence
Medical technology liability claims-made
Workers' compensation insurance
Segregated portfolio cell reinsurance - workers' compensation
Syndicate 1729 casualty
Syndicate 1729 property insurance
Syndicate 1729 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
Loss portfolio transfer*
Purchase accounting
Other
151,870
37,683
32,604
67,631
24,177
678
10,323
9,717
9,137
343,820
67,200
100,123
18,252
1,551
(7,937)
179,189
Gross liability for losses and loss adjustment expenses
$
2,119,847
* Represents the reserve for retroactive coverage, net of a deferred gain, related to a loss portfolio transfer entered into
in the second quarter of 2018 (see Note 4).
193
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
9. 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.
On occasion, ProAssurance has entered into financial instrument transactions that may present off-balance sheet credit
risk or market risk. These transactions include a short-term loan commitment and commitments to provide funding to non-
public investment entities. Under the short-term loan commitment, ProAssurance has agreed to advance funds on a 30 day basis
to a counterparty provided there is no violation of any condition established in the contract. ProAssurance had total funding
commitments of approximately $297.8 million which primarily represented funding commitments related to non-public
investment entities as well as the short-term loan commitment which included the amount at risk if the full short-term loan is
extended and the counterparties default. However, the credit risk associated with the short-term loan commitment is minimal as
the counterparties to the contract are highly rated commercial institutions and to-date have been performing in accordance with
their contractual obligations. Of these total funding commitments, $1.0 million is related to qualified affordable housing project
tax credit investments and is expected to be paid as follows: $0.2 million in 2019, $0.3 million in 2020 and 2021 combined,
$0.4 million in 2022 and 2023 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 2019 of up
to $200.0 million, referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022.
At December 31, 2018, ProAssurance's FAL was comprised of investment securities on deposit with Lloyd's with a carrying
value of $142.7 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 were expanded from £20.0 million to £30.0 million under an
amended Syndicate Credit Agreement executed in February 2018. 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, 2018, the unused commitment under the Syndicate Credit Agreement approximated £7.1 million (approximately
$9.1 million). In January 2019, the Syndicate Credit Agreement was amended to extend the current maturity to December 31,
2020 and to implement an annual auto-renewal feature which allows for ProAssurance to elect to non-renew if notice is given at
least 30 days prior to the next auto-renewal date, which is one year prior to the maturity date.
In October 2018, ProAssurance entered into an agreement with a company to provide data analytics services for certain
product lines within the Company's HCPL book of business. The agreement contains a minimum two year commitment with
optional extension features for an annual fee of approximately $4.8 million per year with additional variable quarterly incentive
fees based on service utilization metrics prescribed in the contract. ProAssurance incurred operating expense associated with
this agreement of $1.0 million in the fourth quarter of 2018 and as of December 31, 2018, the remaining commitment under this
agreement was approximately $8.6 million.
ProAssurance is involved in a number of operating leases, primarily for office space. 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, 2018.
Operating Leases
(In thousands)
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
4,829
4,020
3,557
2,618
1,888
10,212
27,124
ProAssurance incurred rent expense of $7.9 million, $6.7 million and $5.9 million in the years ended December 31, 2018,
2017 and 2016, respectively.
194
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
10. 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 were fully secured and carried
at a weighted average interest rate of 1.91%. The interest rate on borrowings is set
at the time the respective borrowing is initiated or renewed.
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%
(4.10% and 2.86%, respectively) 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,
2018
250,000
$
December 31,
2017
250,000
$
—
123,000
39,064
289,064
1,307
40,460
413,460
1,649
$
287,757
$
411,811
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 0.4%
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 0.125% to 0.25% 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
secured or unsecured and accrue interest at a selected base rate, adjusted by a margin, which can vary from 0% to 1.63%, 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 0.5% or (3) the
one month LIBOR plus 1.0%, 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
support for other activities.
Mortgage Loans
During 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 1.325% with principal and interest payable on a
195
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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 2.35%. Additional information on the
Company's derivative instruments is provided in Note 11.
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, 2018, 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
$
2019
2020
2021
2022
2023
Thereafter
Total principal payments $
1,448
1,503
1,559
1,617
1,677
31,260
39,064
Covenant Compliance
ProAssurance is currently in compliance with all covenants.
11. 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 a portion of its variable-rate debt. As of December 31, 2018, ProAssurance has not designated any
derivative instruments as hedging instruments and does not use derivative instruments for trading purposes.
ProAssurance utilizes 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 10. Under the terms of the interest rate cap agreement, ProAssurance paid a premium of $2 million in 2017 for
the right to receive cash payments based upon a notional amount of $35 million if and when the three-month LIBOR rises
above 2.35%. The Company's variable-rate Mortgage Loans bear an interest rate of three-month LIBOR plus 1.325%.
Therefore, this derivative instrument is effectively ensuring the interest rate related to the Mortgage Loans is capped at a
maximum of 3.675% until expiration of the interest rate cap agreement in October 2027. ProAssurance has designated the
interest rate cap as an economic hedge (non-hedging instrument) of interest rate exposure and any change in fair value of the
derivative is immediately recognized in earnings during the period of change.
196
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
The following table provides a summary of the volume and fair value position of the interest rate cap as well as the
reporting location in the Consolidated Balance Sheets as of December 31, 2018 and 2017.
($ in thousands)
December 31, 2018
December 31, 2017
Derivatives Not
Location in the
Designated as
Consolidated
Hedging Instruments
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 $
1,884
1
$
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, 2018, 2017
and 2016.
(In thousands)
Year Ended December 31
Gains (Losses) Recognized in Income on Derivatives
Derivatives Not Designated as
Hedging Instruments
Interest Rate Cap
Location in the Consolidated
Statements of Income and
Comprehensive Income
Interest expense
2018
2017
2016
$
153
$
(339) $
—
As a result of this derivative instrument, ProAssurance is exposed to risk that the counterparty will fail to meet its
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, 2018, the counterparty had an investment grade rating of BBB- and has performed in accordance with their
contractual obligations.
12. Shareholders’ Equity
At December 31, 2018 and 2017, 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,
2018, 2017 and 2016:
(In thousands)
2018
2017
2016
Issued and outstanding shares - January 1
Repurchase of shares, at cost of $2 million for 2016
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*
53,457
53,251
—
135
45
—
132
74
53,101
(44)
108
86
Issued and outstanding shares - December 31
53,637
53,457
53,251
* Shares issued were valued at fair value (the market price of a ProAssurance common share on the date of issue).
As of December 31, 2018, approximately 2.0 million of ProAssurance's authorized common shares were reserved by the
Board for award or issuance under the incentive compensation plans described in Note 13 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.
197
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
ProAssurance declared cash dividends during 2018, 2017 and 2016 as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter*
Cash Dividends Declared, per Share
2018
2017
2016
$
$
$
$
0.31
0.31
0.31
0.81
$
$
$
$
0.31
0.31
0.31
5.00
$
$
$
$
0.31
0.31
0.31
5.00
* Includes special dividends of $0.50 per share in 2018 and $4.69 per share in both 2017 and 2016.
Quarterly dividends were paid in the month following the quarter in which they were declared. Dividends declared during
2018, 2017 and 2016 totaled $94.3 million, $316.9 million and $315.0 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 18. 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, 2018, total equity of $165.3 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, 2018, 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, 2018, 2017 and 2016, OCI was almost entirely comprised of unrealized gains and
losses, including non-credit impairment losses, arising during the period related to fixed maturity available-for-sale securities,
less reclassification adjustments as shown in the table that follows, net of tax. For the years ended December 31, 2018 and
2017, OCI included changes related to the reestimation of the defined benefit plan liability assumed in the Eastern acquisition
which were nominal in amount. The defined benefit plan is frozen as to the earnings of additional benefits and the benefit plan
liability is reestimated annually. 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.
At December 31, 2018 and 2017, AOCI was almost entirely comprised of accumulated unrealized gains and losses from
fixed maturity available-for-sale securities, including accumulated non-credit impairments recognized through OCI of $0.1
million and $0.5 million, respectively, net of tax. At December 31, 2018 and 2017, accumulated changes in the defined benefit
plan liability not yet recognized in earnings were nominal in amount. Due to the adoption of accounting guidance in the first
quarter of 2018 related to certain impacts of the TCJA, ProAssurance increased AOCI by approximately $3.4 million with a
corresponding decrease to retained earnings of the same amount as of the beginning of 2018. See Note 1 for additional
information on accounting guidance adopted during the period. At December 31, 2018 and 2017, tax effects were computed
using the enacted federal corporate tax rate of 21% and 35%, respectively, with the exception of unrealized gains and losses on
available-for-sale securities held at our U.K. and Cayman Islands entities which in both periods were immaterial in amount.
198
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Amounts reclassified from AOCI to net income and the amounts of deferred tax expense (benefit) included in OCI were
as follows:
(In thousands)
2018
2017
2016
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*
Net reclassification adjustments
Deferred tax expense (benefit) included in OCI
$
274
$
2,512
$
2,417
(621)
—
(347)
73
(274) $
(3)
—
2,509
(878)
1,631
$
(3,641)
(1,500)
(2,724)
953
(1,771)
(9,573) $
(4,676) $
(3,078)
$
$
* Tax effects were computed using a 21% for the year ended December 31, 2018 and a 35% rate for the years ended December
31, 2017 and 2016.
13. Share-Based Payments
Share-based compensation costs are primarily classified as a component of operating expense.
During 2018, 2017 and 2016, 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.
Share-Based
Compensation Expense
Year Ended December 31
Unrecognized Compensation Cost
December 31, 2018
($ in millions, except remaining recognition period)
2018
2017
2016
Amount
Total share-based compensation expense
Tax benefit recognized
$
$
5.3
1.1
$
$
10.6
3.7
$
$
12.5
4.4
$
5.9
Weighted Average
Remaining
Recognition Period
1.5
The majority of awards are equity classified awards and are charged to expense as an increase to additional paid-in capital
over the service period (generally the vesting period) associated with the award. However, a nominal amount of awards are
liability classified awards and are recorded as a liability as they are structured to be settled in cash. As of December 31, 2018,
the majority of share-based compensation expense related to restricted share units. 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 performance goals achieved. For equity classified awards, units sufficient to
satisfy required tax withholdings are paid in cash rather than in shares. Liability classified awards, which are nominal in
amount, are settled in cash at the end of the vesting period.
199
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Restricted Share Units
Activity for restricted share units during 2018, 2017 and 2016 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.
2018
2017
2016
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
Weighted
Average
Grant Date
Fair Value
48.63
44.73
50.07
42.90
49.16
Units
269,520
85,797
$
$
(3,878) $
(84,116) $
267,323
$
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
The aggregate grant date fair value of restricted share units vested and released in 2018, 2017 and 2016 totaled $3.6
million, $2.2 million and $1.8 million, respectively. The aggregate intrinsic value of restricted share units vested and released in
2018, 2017 and 2016 (including units paid in cash to cover tax withholdings) totaled $4.1 million, $3.1 million and $2.1
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 2018, 2017 and 2016 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
2018
2017
2016
Weighted
Average
Grant Date
Fair Value
47.11
44.73
—
42.79
49.95
Base Units
212,105
27,202
$
$
— $
(104,105) $
$
135,202
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
The aggregate grant date fair value of performance share units (base level) vested and released in 2018, 2017 and 2016
totaled $4.5 million, $6.1 million and $6.2 million, respectively. The aggregate intrinsic value of performance share units (base
level) vested and released in 2018, 2017 and 2016 (including units paid in cash to cover tax withholdings) totaled $5.0 million,
$8.7 million and $6.9 million, respectively. The weighted average level at which the vested units were issued was 125%, 119%
and 98% during 2018, 2017 and 2016, respectively, based on performance levels achieved.
200
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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 2018, 2017 and
2016 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
2018
2017
2016
Weighted
Average
Grant Date
Fair Value
49.40
—
50.19
46.28
51.05
Units
70,292
$
— $
(1,594) $
(24,016) $
44,682
$
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
The aggregate grant date fair value of purchase match units vested and released in 2018, 2017 and 2016 totaled $1.1
million, $1.0 million and $0.9 million, respectively. The aggregate intrinsic value of purchase match share units vested and
released in 2018, 2017 and 2016 (including units paid in cash to cover tax withholdings) totaled $1.1 million, $1.4 million and
$1.2 million, respectively.
Stock Options
ProAssurance also had certain fully-vested employee stock options outstanding during 2016, as summarized below.
ProAssurance had no options exercised during 2018 and 2017 and no outstanding options at December 31, 2018, 2017 or 2016.
Outstanding, vested and exercisable,
beginning of year
Exercised
Outstanding, vested and exercisable,
end of year
2018
2017
2016
Weighted
Average
Exercise
Price
Options
Weighted
Average
Exercise
Price
Options
Options
Weighted
Average
Exercise
Price
— $
— $
— $
—
—
—
— $
— $
— $
—
—
—
$
2,144
(2,144) $
25.02
25.02
— $
—
The aggregate intrinsic value of options exercised totaled $0.1 million for the year ended December 31, 2016. There were
no cash proceeds from options exercised during the year ended December 31, 2016.
14. 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 investment in unconsolidated subsidiaries, totaled $285.8
million at December 31, 2018 and $269.0 million at December 31, 2017. ProAssurance's VIE interests, carried as a part of other
investments, totaled $33.9 million at December 31, 2017.
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 9, ProAssurance has no arrangements with any of the VIEs to provide other financial support to or on behalf of the VIE.
At December 31, 2018, ProAssurance’s maximum loss exposure relative to these investments was limited to the carrying value
of ProAssurance’s investment in the VIE.
201
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
15. 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:
(In thousands, except per share data)
2018
2017
2016
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
53,598
53,393
53,216
70
63
18
85
110
23
73
135
24
Weighted average number of common shares
outstanding, diluted
53,749
53,611
53,448
Effect of dilutive shares on earnings per share
$
— $
(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 years ended December 31, 2018 and 2017 exclude approximately 2,000 and 7,000 common share
equivalents issuable under the Company's stock compensation plans, respectively, as their effect would be antidilutive. There
were no common share equivalents that were antidilutive for the year ended December 31, 2016.
202
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
16. Segment Information
ProAssurance's segments are based on the Company's internal management reporting structure for which financial results
are regularly evaluated by the Company's CODM to determine resource allocation and assess operating performance. The
Company continually assesses its internal management reporting structure and information evaluated by the CODM to
determine whether any changes have occurred that would impact its segment reporting structure.
Segment Reorganization
During the third quarter of 2018, ProAssurance altered its internal management reporting structure and the financial
results evaluated by its CODM; therefore, ProAssurance changed its operating segments to align with how the CODM currently
oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization,
ProAssurance added an operating and reportable segment: Segregated Portfolio Cell Reinsurance.
The Segregated Portfolio Cell Reinsurance segment provides the operating results of SPCs that assume workers’
compensation insurance, healthcare professional liability insurance or a combination of the two. The underwriting results of the
SPCs that assume workers’ compensation business and healthcare professional liability business were previously reported in the
Company's Workers’ Compensation and Specialty P&C segments, respectively, and the results of investment assets solely
allocated to SPC operations, previously reported in the Company's Corporate segment, are now reported in the Segregated
Portfolio Cell Reinsurance segment. The Workers' Compensation segment has also been renamed "Workers' Compensation
Insurance." All prior period segment information has been recast to conform to the current period presentation. The segment
reorganization had no impact on previously reported consolidated financial results.
Descriptions of ProAssurance's five operating and reportable segments are as 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. Prior to 2018, the Specialty P&C segment ceded certain
premium to the Lloyd's Syndicates 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 Syndicates segment results are typically reported on a quarter
delay. For consistency purposes, results from this ceding arrangement, other than cash receipts or disbursements, are reported
within the Specialty P&C segment on the same one-quarter delay. Additionally, the Specialty P&C segment cedes healthcare
professional liability business to certain SPCs in the Company's Segregated Portfolio Cell Reinsurance segment.
Workers' Compensation Insurance provides workers' compensation products primarily to employers with 1,000 or fewer
employees. The segment's products include guaranteed cost, policyholder dividend policies, retrospectively-rated policies,
deductible polices and alternative market solutions. Alternative market products include program design, fronting, claims
administration, risk management, SPC rental, asset management and SPC management services. Alternative market premiums
are 100% ceded to either SPCs in the Company's Segregated Portfolio Cell Reinsurance segment or, to a limited extent, to
captive insurers unaffiliated with ProAssurance.
Segregated Portfolio Cell Reinsurance reflects the operating results (underwriting profit or loss, plus investment results)
of SPCs at Eastern Re and Inova Re, the Company's Cayman Islands SPC operations. The SPCs assume workers' compensation
insurance, healthcare professional liability insurance or a combination of the two from the Workers' Compensation Insurance
and Specialty P&C segments. Each SPC is owned, fully or in part, by an agency, group or association and the operating results
of the SPCs are due to the participants of that cell. ProAssurance participates to a varying degree in the results of selected SPCs.
SPC operating results due to external cell participants are reflected as a SPC dividend expense in the Segregated Portfolio Cell
Reinsurance segment and in ProAssurance's Consolidated Statements of Income and Comprehensive Income. In addition, the
Segregated Portfolio Cell Reinsurance segment includes the SPC investment results as the investments are solely for the benefit
of the cell participants and investment results due to external cell participants are reflected in the SPC dividend expense. The
segment operating results reflects ProAssurance's share of the underwriting and investment results of the SPCs in which
ProAssurance participates.
During the first quarter of 2018, ProAssurance restructured its Cayman Islands SPC operations. Beginning in 2018, all
new and renewing alternative market business previously ceded to the SPCs at Eastern Re, with the exception of one program,
is now ceded to SPCs operated by a newly formed wholly owned Cayman Islands subsidiary, Inova Re. As part of the
restructuring, all SPCs previously operated by Eastern Re, with the exception of one program, ceased assuming new and
renewing business on or after January 1, 2018. The external cell participants' cumulative undistributed earnings and the results
of all SPCs for the current period due to external cell participants continue to be reported as SPC dividends payable and SPC
dividend expense, respectively.
203
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Lloyd's Syndicates includes operating results from ProAssurance's participation in Lloyd's of London Syndicate 1729 and
Syndicate 6131, which is a SPA that began writing business effective January 1, 2018. 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 the majority of 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,
ProAssurance increased its participation in the operating results of Syndicate 1729 from 58% to 62% and began its 100%
participation in the operating results of Syndicate 6131; however, due to the quarter delay these changes were not reflected in
the Lloyd's Syndicates segment results until the second quarter of 2018. Syndicate 1729 underwrites risks over a wide range of
property and casualty insurance and reinsurance lines in both the U.S. and international markets. Syndicate 6131 focuses on
contingency and specialty property business, also within the U.S. and international markets.
Corporate includes ProAssurance's investment operations, other than those reported in the Segregated Portfolio Cell
Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The segment also includes non-premium
revenues generated outside of the Company's insurance entities and corporate expenses.
The accounting policies of the segments are described in Note 1. ProAssurance evaluates the performance of its Specialty
P&C and Workers' Compensation Insurance segments based on before tax underwriting profit or loss, which excludes
investment performance. ProAssurance evaluates the performance of its Segregated Portfolio Cell Reinsurance segment based
on before tax operating profit or loss, which includes the investment performance of assets solely allocated to SPC operations.
Performance of the Lloyd's Syndicates 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, other than the investments discussed above that are solely allocated to the Segregated Portfolio
Cell Reinsurance and Lloyd's Syndicates segments, and other assets are not managed at the segment level.
Financial results by segment were as follows:
(In thousands)
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized gains (losses)
Other income (expense)(1)
Year Ended December 31, 2018
Specialty
P&C
Workers'
Compensation
Insurance
Segregated
Portfolio Cell
Reinsurance
Lloyd's
Syndicates
Corporate
Inter-
segment
Eliminations
Consolidated
$
491,787
$
186,079
73,940
$
67,047
$
— $
— $
818,853
—
—
—
—
—
—
5,844
2,412
1,566
3,358
86,960
—
(3,149)
211
—
(460)
322
8,948
(39,879)
3,525
—
—
—
—
(2,481)
91,884
8,948
(43,488)
9,833
—
(593,210)
Net losses and loss adjustment expenses
(384,431)
(118,483)
(38,726)
(51,570)
Underwriting, policy acquisition and
operating expenses(1)
Segregated portfolio cells dividend (expense)
income
Interest expense
Income tax benefit (expense)
Segment operating results
Significant non-cash items:
Depreciation and amortization, net of
accretion
$
$
(112,419)
(55,693)
(22,426)
(31,686)
(18,767)
2,435
(238,556)
—
—
—
—
—
—
(9,122)
—
—
—
—
317
—
(16,163)
17,715
—
46
—
(9,122)
(16,117)
18,032
781
$
14,315
$
2,294
$
(12,672)
$
42,339
$
— $
47,057
7,050
$
3,850
$
441
$
(8)
$
9,922
$
— $
21,255
204
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
Year Ended December 31, 2017
Specialty
P&C
Workers'
Compensation
Insurance
Segregated
Portfolio Cell
Reinsurance
Lloyd's
Syndicates
Corporate
Inter-segment
Eliminations
Consolidated
$
449,823
$
163,309
$
68,197
$
57,202
$
— $
— $
738,531
—
—
—
—
—
—
5,688
2,096
1,059
—
3,914
115
1,736
92,867
—
107
(1,476)
(44,220)
8,033
12,388
2,888
—
—
—
—
(1,797)
95,662
8,033
16,409
7,514
—
(469,158)
(In thousands)
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized gains (losses)
Other income (expense)(1)
Net losses and loss adjustment expenses
(285,250)
(102,233)
(37,455)
Underwriting, policy acquisition and operating
expenses(1)
Segregated portfolio cells dividend (expense)
income (2)
Interest expense
Income tax benefit (expense)(2)
Segment operating results
Significant non-cash items:
Depreciation and amortization, net of
accretion
(107,972)
(52,576)
(20,764)
(26,963)
(29,275)
1,797
(235,753)
(5,181)
—
—
57,108
7,922
$
$
—
—
—
$
$
10,596
3,480
$
$
(10,590)
—
—
4,476
680
$
$
—
—
568
—
(16,844)
(21,927)
(13,046)
$
48,130
(20)
$
16,734
$
$
—
—
—
(15,771)
(16,844)
(21,359)
— $
107,264
— $
28,796
(In thousands)
Net premiums earned
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized gains (losses)
Other income (expense)(1)
Year Ended December 31, 2016
Specialty
P&C
Workers'
Compensation
Insurance
Segregated
Portfolio Cell
Reinsurance
Lloyd's
Syndicates
Corporate
Inter-segment
Eliminations
Consolidated
$
454,506
$
161,988
$
62,137
$
54,650
$
— $
— $
733,281
—
—
—
—
—
—
5,306
2,218
711
—
2,525
18
1,410
97,891
—
76
1,415
(34,116)
(5,762)
32,274
1,069
—
—
—
—
(2,218)
100,012
(5,762)
34,875
7,808
—
(443,229)
Net losses and loss adjustment expenses
(266,090)
(107,791)
(35,232)
Underwriting, policy acquisition and operating
expenses(1)
Segregated portfolio cells dividend (expense)
income
Interest expense
Income tax benefit (expense)
Segment operating results
Significant non-cash items:
Depreciation and amortization, net of
accretion
(103,656)
(53,597)
(18,936)
(22,832)
(30,807)
2,218
(227,610)
—
—
—
$
$
90,066
7,268
$
$
—
—
—
2,818
5,600
$
$
(8,142)
—
—
3,081
595
$
$
—
—
(384)
219
132
$
$
—
(15,032)
(24,736)
54,897
19,194
$
$
—
—
—
(8,142)
(15,032)
(25,120)
— $
151,081
— $
32,789
(1) As a result of the third quarter 2018 segment reorganization, certain fees for services provided to the SPCs at Eastern Re and Inova Re are recorded as expenses within the
Segregated Portfolio Cell Reinsurance segment and as other income within the Workers' Compensation Insurance segment. These fees are eliminated between segments in
consolidation. These services primarily include SPC rental fees and were previously eliminated within the Company's Workers' Compensation segment.
(2) During 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 then current period and was unrelated to the Company's Cayman Islands
captive operations. The $1.8 million tax impact of the expense recognized in 2017 was included in the Corporate segment's income tax benefit (expense).
205
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
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)
2018
2017
2016
Year Ended December 31
Specialty P&C Segment
Gross premiums earned:
Healthcare professional liability
$
518,303
$
477,561
$
474,981
Legal professional liability
Medical technology liability
Other
Ceded premiums earned
Segment net premiums earned
Workers' Compensation Insurance Segment
Gross premiums earned:
Traditional business
Alternative market business
Ceded premiums earned
Segment net premiums earned
Segregated Portfolio Cell Reinsurance Segment
Gross premiums earned:
Workers' compensation (1)
Healthcare professional liability(2)
Ceded premiums earned
Segment net premiums earned
Lloyd's Syndicates Segment
Gross premiums earned:
Property and casualty(3)
Ceded premiums earned
Segment net premiums earned
26,094
35,157
468
(88,235)
491,787
199,466
83,508
(96,895)
186,079
78,255
5,009
(9,324)
73,940
25,771
33,836
415
(87,760)
449,823
173,246
80,698
(90,635)
163,309
72,814
4,097
(8,714)
68,197
83,307
(16,260)
67,047
69,749
(12,547)
57,202
26,125
34,158
667
(81,425)
454,506
171,434
75,658
(85,104)
161,988
66,899
3,310
(8,072)
62,137
60,564
(5,914)
54,650
Consolidated net premiums earned
$
818,853
$
738,531
$
733,281
(1) Premium for all periods is assumed from the Workers' Compensation Insurance segment.
(2) Premium for all periods is assumed from the Specialty P&C segment.
(3) Includes premium assumed from the Specialty P&C segment of $5.0 million, $11.8 million and $14.0 million for years ended
December 31, 2018, 2017 and 2016, respectively.
17. 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 the ProAssurance Savings Plan of $7.0 million, $7.8 million and $6.9 million during
the years ended December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016. ProAssurance deferred compensation liabilities totaled $21.3 million and $20.5
206
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
million at December 31, 2018 and 2017, respectively. The liabilities included amounts due under the ProAssurance Plan and
amounts due under individual agreements with current or former employees.
18. 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, 2018, 2017 or 2016. 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,
2018, 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)
Statutory Net Earnings
Statutory Capital and Surplus
2018
$135
2017
$139
2016
$163
2018
$1,041
2017
$1,175
At December 31, 2018, $1.3 billion of ProAssurance's consolidated net assets were held at its domestic insurance
subsidiaries, of which approximately $128 million are permitted to be paid as dividends over the course of 2019 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.
19. Quarterly Results of Operations (unaudited)
The following is a summary of unaudited quarterly results of operations for 2018 and 2017:
(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 (loss)
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 (loss)
Basic earnings per share
Diluted earnings per share
1st
187,159
152,572
$
$
(22,786) $
$
11,856
0.22
0.22
1st
182,903
147,927
$
$
$
$
(28,776) $
$
41,455
0.78
0.77
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018*
2nd
223,591
184,543
$
$
(22,815) $
$
28,423
0.53
0.53
$
$
2017*
2nd
180,353
144,562
$
$
(29,012) $
$
19,518
0.37
0.36
$
$
3rd
206,070
169,154
$
$
(21,549) $
$
31,228
0.58
0.58
3rd
192,303
161,631
$
$
$
$
(32,275) $
$
28,949
0.54
0.54
$
$
4th
202,033
179,056
(24,967)
(24,450)
(0.46)
(0.46)
4th
182,972
149,399
(44,297)
17,342
0.32
0.32
*Due to rounding, the sum of quarterly amounts may not equal the total amount for the respective year-to-date periods
207
ProAssurance Corporation and Subsidiaries
Schedule I -- Summary of Investments -- Other than Investments in Related Parties
(In thousands)
Type of Investment
Fixed maturities
Bonds:
U.S. Government or government agencies and authorities
States, municipalities and political subdivisions
$
Foreign governments
Public utilities
All other corporate bonds
Certificates of deposit
Mortgage-backed securities
Total Fixed Maturities
Equity Securities
Common Stocks:
Public utilities
Banks, trusts and insurance companies
Industrial, miscellaneous and all other
Total Equity Securities, trading
Other long-term investments
Short-term investments
Total Investments
$
December 31, 2018
Recorded
Cost
Basis
Fair
Value
Amount Which is
Presented
in the
Balance Sheet
$
171,770
289,544
30,318
76,735
$
170,154
293,772
29,892
76,059
170,154
293,772
29,892
76,059
1,160,474
1,140,356
1,140,356
100
426,329
2,155,270
7,553
64,148
379,230
450,931
352,654
308,367
3,267,222
$
100
421,653
2,131,986
9,177
62,344
371,416
442,937
466,140
308,319
3,349,382
$
100
421,653
2,131,986
9,177
62,344
371,416
442,937
466,140
308,319
3,349,382
208
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:
Due to subsidiaries
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,
2018
December 31,
2017
$
1,599,486
$
1,713,656
78,076
76,347
875
25,757
—
45,683
155,094
268,181
1,200
81,009
2,666
33,829
$
1,826,224
$
2,255,635
$
$
$
4,067
43,446
6,823
248,886
303,222
—
267,292
22,008
371,540
660,840
630
628
1,522,372
1,523,002
1,826,224
$
1,594,167
1,594,795
2,255,635
209
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 (loss)
Comprehensive income
Year Ended December 31
2018
2017
2016
$
3,495
(325)
(789)
977
3,358
14,844
17,092
31,936
(28,578)
(7,142)
(21,436)
68,493
47,057
(35,238)
11,819
$
$
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
$
$
210
ProAssurance Corporation and Subsidiaries
Schedule II – Condensed Financial Information of Registrant
Condensed Statements of Cash Flow
(In thousands)
Year Ended December 31
2018
2017
2016
$
27,981
$
67,779
$
41,356
—
—
(1,000)
169,822
194,035
29,395
—
—
(21,576)
(11,232)
—
330
360,774
(123,000)
—
1,154
(316,476)
(5,685)
(444,007)
(55,252)
81,009
25,757
4,966
14,777
43,446
98,292
$
$
$
$
$
295,035
11,811
99,694
—
1,100
(25,449)
(6,883)
(4,066)
(2,276)
368,966
(77,000)
—
12,030
(315,228)
(6,868)
(387,066)
49,679
31,330
81,009
17,193
15,892
267,292
190,709
$
$
$
$
$
100,240
(262,169)
70,125
(1,983)
(1,100)
—
1,695
(3,090)
(2,805)
(100,087)
100,000
(2,106)
11,384
(118,812)
(3,697)
(13,231)
(71,962)
103,292
31,330
(8,519)
14,732
265,659
174,270
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
$
$
$
$
$
211
ProAssurance Corporation and Subsidiaries
Schedule II – Condensed Financial Information of Registrant
Note to Condensed Financial Statements of Registrant
Basis of Presentation
The registrant-only financial statements should be read in conjunction with ProAssurance Corporation’s Consolidated
Financial Statements and Notes thereto.
At December 31, 2018 and 2017, 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
Effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, ProAssurance
Corporation adopted ASU 2016-15 which provides guidance related to the classification of certain cash receipts and cash
payments presented in the statement of cash flows. As a result of the adoption, ProAssurance Corporation reclassified
approximately $24.4 million and $9.9 million in distributions from unconsolidated subsidiaries from investing activities to
operating activities in the registrant-only Condensed Statements of Cash Flow for the years ended December 31, 2017 and
2016, respectively. See Note 1 of the Notes to Consolidated Financial Statements for additional information.
212
ProAssurance Corporation and Subsidiaries
Schedule III – Supplementary Insurance Information
(In thousands)
2018
2017
2016
Net premiums earned
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Consolidated
Net investment income (1)
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Corporate
Consolidated
Losses and loss adjustment expenses incurred related to current year,
net of reinsurance
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Consolidated
Losses and loss adjustment expenses incurred related to prior year, net
of reinsurance
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Consolidated
Paid losses and loss adjustment expenses, net of reinsurance
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Inter-segment eliminations
Consolidated
Amortization of DPAC
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicate
Inter-segment eliminations
Consolidated
Other underwriting, policy acquisition and operating expenses
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Corporate
Inter-segment eliminations
Consolidated
Continued on the following page.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
491,787 $
186,079
73,940
67,047
818,853 $
1,566 $
3,358
86,960
91,884 $
461,516 $
126,534
47,693
49,583
685,326 $
(77,085) $
(8,051)
(8,967)
1,987
(92,116) $
354,221 $
108,742
29,320
37,496
200
529,979 $
52,253 $
16,864
21,039
15,913
(1,568)
104,501 $
60,166 $
38,829
1,387
15,773
18,767
(867)
134,055 $
449,823 $
163,309
68,197
57,202
738,531 $
1,059 $
1,736
92,867
95,662 $
404,543 $
107,975
45,968
45,032
603,518 $
(119,293) $
(5,742)
(8,513)
(812)
(134,360) $
320,776 $
96,734
28,761
29,926
118
476,315 $
47,615 $
14,551
19,927
15,194
(1,536)
95,751 $
60,357 $
38,025
837
11,769
29,275
(261)
140,002 $
454,506
161,988
62,137
54,650
733,281
711
1,410
97,891
100,012
403,249
109,342
39,801
34,615
587,007
(137,159)
(1,551)
(4,569)
(499)
(143,778)
341,189
89,418
27,391
21,254
—
479,252
44,344
13,273
18,385
13,769
(1,393)
88,378
59,312
40,324
551
9,063
30,807
(825)
139,232
213
ProAssurance Corporation and Subsidiaries
Schedule III – Supplementary Insurance Information
(In thousands)
Continued from previous page
Net premiums written
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Consolidated
Deferred policy acquisition costs (1)
Reserve for losses and loss adjustment expenses (1)
Unearned premiums (1)
2018
2017
2016
$
$
$
$
$
494,148 $
195,350
75,547
69,869
834,914 $
466,621 $
173,566
68,862
54,969
764,018 $
454,718
163,513
64,028
56,274
738,533
54,116 $
2,119,847 $
415,211 $
50,261 $
2,048,381 $
398,884 $
46,809
1,993,428
372,563
(1) Assets are not allocated to segments because investments and assets are not managed at the segment level.
214
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
2018
2017
2016
$
$
903,354 $
(126,036)
41,535
818,853 $
5.07%
821,249 $
(110,347)
27,629
738,531 $
3.74%
790,791
(95,315)
37,805
733,281
5.16%
* All of ProAssurance’s premiums are related to property and liability coverages.
215
Exhibit
Number
2
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
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
Dana S. Hendricks
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)
10.3
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.*
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.*
216
10.4
Form of Indemnification Agreement between ProAssurance and each of the following named executive
officers and directors of ProAssurance*:
Bruce D. Angiolillo
Michael L. Boguski
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
Thomas A. S. Wilson, Jr.
10.5
10.6
10.7
10.7(a)
10.8
10.8(a)
10.8(b)
10.8(c)
10.8(d)
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.
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.*
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.*
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.*
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.
217
10.8(e)
10.9
10.10
10.11
10.13
10.13(a)
10.14
10.15
10.16
10.17
21.1
23.1
31.1
31.2
32.1
32.2
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.*
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.
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.
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
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
218
Intentionally Left Blank
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:
(in thousands, except per share amounts)
2018
2017
2016
2015
2014
Year Ended December 31,
Net income
Items excluded in the calculation
of Non-GAAP operating income:
Net realized investment (gains) losses
Net realized gains (losses) attributable to SPCs which no
profit/loss is retained (1)
Guaranty fund assessments (recoupments)
Effect of confidential settlements, net
Pre-tax effect of exclusions
Tax effect (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
$
47,057 $
107,264 $
151,081 $
116,197 $
196,565
43,488
(16,409)
(34,875)
41,639
(14,654)
(2,535)
148
—
41,101
(8,631)
32,470
3,083
(157)
—
(13,483)
4,719
(8,764)
2,049
153
—
(32,673)
11,436
(21,237)
(1,192)
218
—
40,665
(14,233)
26,432
377
(169)
(866)
(15,312)
5,359
(9,953)
79,527
98,500
129,844
142,629
186,612
—
—
6,541
3,497
—
—
—
—
—
—
79,527 $
108,538 $
129,844 $
142,629 $
186,612
0.88 $
0.60
1.48 $
2.00 $
0.02
2.02 $
2.83 $
(0.40)
2.43 $
2.11 $
0.48
2.59 $
3.30
(0.17)
3.13
$
$
$
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment and
the portion of SPC operating earnings, including the gain or loss, net of our participation, is due to the external cell participants through the 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 the SPC dividend expense (income) which is due to the external cell
participants.
(2) The annual expected incremental tax rate for 2018 is 21% as compared to 35% for 2017, associated with the taxable or tax deductible items
listed above. Excluding certain discrete items, which are tax effected at the annual expected incremental tax rate in the period they are included in
net income, our effective tax rate for the respective years was applied to these items in calculating net income.
(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 made a reasonable estimate of the effects on our deferred tax asset balances at December 31, 2017 as it related
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. During 2018, we were able to complete our accounting for the impact of the TCJA on our December 31,
2017 deferred tax asset balances related to executive compensation; no measurement period adjustment was recorded in 2018 as a result.
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 INFORMATION
INVESTOR INFORMATION
There were 53,640,306 shares of
ProAssurance Corporation common
stock outstanding at March 15, 2019. On
that date, we had 3,032 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 SHARES
If 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:
By Phone
(800) 851-4218 or (201) 680-6578
By Internet
Information about your account including
share transfer, direct deposit of dividends
and your dividend payment history:
www-us.computershare.com/Investor.
For immediate access to tax forms:
www-us.computershare.com/investor/
QuickTax.
For technical assistance with the
Computershare website, please phone
(800) 942-5909.
By Mail
Computershare
P. O. Box 30170
College Station, TX 77842-3170
Computershare
211 Quality Circle, Suite 210
College Station, TX 77845-4470
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 REQUIREMENTS
We 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 provides 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
leadership, 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 7, 2018.
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, 2019.
INVESTOR RELATIONS
The Investor Relations section of our
website (http://investor.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
PROASSURANCE
Any 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.com
By U. S. Postal Service
ProAssurance Corporation
Investor Relations
P. O. Box 590009
Birmingham, AL 35259-0009
By Phone or Fax
Phone: (205) 877-4400 • (800) 282-6242
Fax: (205) 802-4799
Annual Meeting
The 2019 Annual Meeting is scheduled
for 9:00 AM CDT on Wednesday,
May 22, 2019 at the headquarters
of ProAssurance Corporation, 100
Brookwood Place, Birmingham,
Alabama 35209.
100 Brookwood Place
Birmingham, Alabama 35209
205-877-4400
800-282-6242
proassurance.com