2019 Annual
Report
Financial Highlights
(Dollars in thousands)
2019
2018
2017
2016
2015
INCOME STATEMENT HIGHLIGHTS
Gross premiums written
Net premiums earned
Total revenues
$ 967,490 $ 957,311 $ 874,876 $ 835,014 $ 812,218
$ 847,532 $ 818,853 $ 738,531 $ 733,281 $ 694,149
$ 999,834 $ 886,030 $ 866,149 $ 870,214 $ 772,079
Net losses and loss adjustment expenses
$ 753,915 $ 593,210 $ 469,158 $ 443,229 $ 410,711
Net income
Non-GAAP Operating Income (Loss) (1)
$
$
1,004 $
47,057 $ 107,264 $ 151,081 $ 116,197
(43,779) $
79,527 $ 108,538 $ 129,844 $ 142,629
BALANCE SHEET HIGHLIGHTS
Total investments
Total assets (2)
$ 3,390,409 $ 3,349,382 $ 3,686,528 $ 3,925,696 $ 3,650,130
$ 4,805,599 $ 4,600,726 $ 4,929,197 $ 5,065,181 $ 4,906,021
Reserve for losses and loss adjustment expenses
$ 2,346,526 $ 2,119,847 $ 2,048,381 $ 1,993,428 $ 2,005,326
Debt (2)
Total liabilities (2)
$ 285,821 $ 287,757 $ 411,811 $ 448,202 $ 347,858
$ 3,293,686 $ 3,077,724 $ 3,334,402 $ 3,266,479 $ 2,947,667
(1) A reconciliation of Net Income to Non-GAAP Operating Income (Loss) 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, prior to 2016, were
reported as a part of other assets.
To Our Fellow
Shareholders,
Edward L. Rand, Jr.
President & Chief Executive Officer
Responding to change is nothing new for
ProAssurance. Navigating through periods of
turbulence in our business with a clear-eyed,
long-term strategy is our hallmark, and we
will not deviate from that approach as we face
this latest iteration of the insurance cycle.
To that end, 2020 will clearly be a year of change for
everyone. While this letter will focus primarily on 2019,
I want to begin by addressing the COVID-19 pandemic
that has left an indelible mark on us all. While it is too
early to quantify any potential impact to our financial
performance, we have implemented a series of
preventative measures at our offices across the country
to protect our employees, and we anticipate any effects
of the virus to our daily operations will be minimal. We
remain fully prepared to continue providing the highest
level of service to our customers and distribution
partners as they manage their own exposures to this
pandemic. We will disclose any material effects of the
COVID-19 virus on our results for 2020 as they become
known to us.
Now, on to 2019.
Change can come in many forms, and Stan Starnes’
retirement as Chief Executive Officer is foremost
among them. On behalf of all of the team members at
ProAssurance, as well as our Board of Directors, I want to
2019 Annual Report 1
Gross Written Premiums
$967,490
$957,311
$812,218
$835,014
$779,609
$874,876
$553,922
$533,205
$565,895
$536,431
$567,547
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thank Stan for all he has done and continues to do as our
Executive Chairman. We are a truly different organization
than when Stan took the helm nearly thirteen years ago,
and were I to fill every page of this report, I could not list
half of his innumerable contributions to the organization.
I am humbled and honored to follow in his stead, to lead
ProAssurance through the next era. So this year, I have
the pleasure and privilege of writing to you for the first
time as Chief Executive Officer of ProAssurance.
From our earliest days, we have operated with a strategy
both responsive to near-term challenges and proactive
to long-term opportunity. We believe that, as a specialist,
our deep expertise and commitment to our customers
throughout the insurance cycles enable us to outperform
our peers over time. 2019 was a year of contrast, in which
our disappointment with results was buffered by our
confidence in the future.
of disciplined underwriting and appropriate pricing
grows every day. These trends have weighed on the
performance of our Specialty Property & Casualty
segment and the Company as a whole, and I am the first
to say that we must do better. I have stated before that
this cycle feels different, and we should not expect the
market to harden as quickly nor perhaps as drastically
as in the early 2000s. We must challenge the mindset
that what has worked before will work again, and only
companies that are prepared to adapt will succeed.
While the surface features may be different, the
underlying landscape is familiar. For over forty years,
ProAssurance and its predecessors have successfully
navigated the peaks and valleys of the long cycles
characteristic of our businesses. We have done so by
developing deep expertise in the lines of business in
which we specialize, by being patient, and by taking
advantage of the right opportunities at the right time.
As I said following the fourth quarter, our results for
2019 were unacceptable. The healthcare professional
liability loss environment continues to evolve as medicine
grows more complex and expensive, and the importance
2019 proved to be a year of transition, beyond a
change of Chief Executive Officer. We restructured our
executive team, consolidated our Specialty Property
2 ProAssurance Corporation
Book Value
■■ Book Value + Dividends
■■ Book Value
$53.48
$50.24
$46.46
$40.23
$30.17
$39.13
$36.88
$21.35
$16.81
$29.83
$28.11
$2.29
$3.32
$4.91
$6.62
$7.61
$10.46
$8.75
’92
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’96
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’99
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’01
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Book value has declined as we have returned capital to shareholders through dividends.
& Casualty operations, reduced our participation in
Lloyd’s of London Syndicate 1729, and, with the planned
acquisition of the NORCAL Group announced just a few
weeks ago, negotiated the largest single transaction in
our Company’s history. Each of these strategic actions
contribute to the high level of confidence I mentioned
above, and I would like to expand upon them in turn.
operations, expense reduction, recruitment of additional
talent, tightening of underwriting criteria, terms and
conditions, and price strengthening – all of which are
geared toward returning our Specialty Property &
Casualty segment to profitability while maintaining
the stalwart claims defense and unparalleled risk
management expertise on which our policyholders rely.
The changes we made to our executive leadership team
allow for expedited responsiveness and expanded
accountability in each aspect of our business. In May
2019, Mike Boguski – formerly President of Eastern
Alliance Insurance Group, ProAssurance’s workers’
compensation insurance subsidiary – became President
of our Specialty Property & Casualty business. Mike has
a long history and track record of operational excellence
with a focus on personal accountability. In the time
since he took on this new role, he and his team have
undertaken a comprehensive review of the Specialty
Property & Casualty business strategy in response to
our view of the loss trends and changing conditions
in healthcare professional liability. This included
organizational structure enhancements, consolidation of
Meanwhile, Kevin Shook – formerly Executive Vice
President of Eastern – was promoted to President of
Eastern. It was a seamless transition, as Kevin has been
deeply involved in Eastern’s success for almost twenty
years. Under his leadership, the Workers’ Compensation
Insurance segment has continued to produce sustainable
profitability in a highly competitive marketplace.
Finally, and importantly, I asked Noreen Dishart, our
Chief Human Resources Officer, to join our executive
leadership team. Our belief in our people is a
cornerstone of ProAssurance’s strategy, and Noreen is
a key driver of our Employer of Choice initiative. She is a
direct line between our employees and me with regard
to our culture, employee development, and succession
2019 Annual Report 3
For over forty years, ProAssurance and its predecessors
have successfully navigated the peaks and valleys of the long
cycles characteristic of our businesses.
strategies, which I believe is essential for the long-term
success of any company.
Our Chief Financial Officer, Dana Hendricks, and
General Counsel, Jeff Lisenby, will continue in their
respective roles and round out the executive leadership
team. Dana began her career in the accounting
department at PICA, our podiatric subsidiary, in
2001 and moved to Birmingham to become CFO in
September 2018. Jeff joined our predecessor, Medical
Assurance, in 2001 and has led our corporate legal and
compliance functions since that time while progressively
taking on additional duties.
creating significant long-term value for ProAssurance
shareholders. We have worked closely with NORCAL’s
senior leadership team and Board of Directors
throughout this process and negotiations, and I would
like to thank them for all their efforts bringing us to this
point. We are targeting to close the transaction by the
end of 2020, and while we are excited with the progress
that has been made to date, there is much more to do to
ensure that our successful partnership with NORCAL is
the game-changing transaction we all expect. The best
efforts of both companies over the next three years will
be required to deliver the vast potential value of this deal
for ProAssurance and our investors.
This new executive leadership team, and the strategic
business decisions that have been made to date, will
improve our operating efficiency and effectiveness,
expand our commitment to transparency and
accountability, and empower our employees in our
mission to Protect Others. When we do a great job for
our policyholders, we will ultimately do a great job for
our shareholders. That relationship is indivisible under
the promise of Treated Fairly.
It will take time for the full benefits of these
enhancements to flow through to our bottom line, but
I believe firmly that our senior executives, along with a
team of approximately 950 outstanding employees, will
grow the ProAssurance value proposition to new levels.
While everything else I have mentioned was underway in
2019, we were working diligently toward an agreement
to acquire NORCAL Group. The NORCAL transaction,
which is subject to required policyholder and regulatory
approvals, represents a transformational opportunity
for our healthcare professional liability business to
enhance the geographic footprint and services we can
deliver to our customers and distribution partners, while
We have faced the ups and downs of the insurance cycle
many times before, and we understand the challenges
and opportunities that accompany the current stage
of the cycle. This company looks very different than it
did when Alabama’s physicians decided they needed
their own mutual insurance company – our history of
successful M&A has brought almost twenty companies
into the ProAssurance family. However, we remain one
company, with one unified mission to Protect Others, and
every step we take is toward that objective. As we begin
2020, and I begin my first full year serving this company
as CEO, I look forward with eager anticipation to the next
chapter of the ProAssurance story as we strive daily to
deliver the promise of Treated Fairly to our policyholders,
employees, and shareholders.
Thank you,
Edward L. Rand, Jr.
President & Chief Executive Officer
4 ProAssurance Corporation
Board of Directors
COMMITTEES
INDEPENDENCE
AUDIT
COMPENSATION
EXECUTIVE
NOMINATING
& CORPORATE
GOVERNANCE
W. Stancil Starnes, Esq.
Executive Chairman, 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
Maye Head Frei
Chairman, Ram Tool Construction Supply Company
M. James Gorrie
President and Chief Executive Officer, Brasfield & Gorrie
Ziad R. Haydar, M.D.
Independent Healthcare Consultant,
Retired Chief Clinical Officer, Ascension Health
Edward L. Rand, Jr.
President and Chief Executive Officer, ProAssurance
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.
Retired Physician
N
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M
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M
M
C E
M
M
M
M
M
M
C
Management, Non-Independent
I
Independent
N
Member
M
Chairman
C
Financial Expert
E
Executive Officers
Michael L. Boguski
President
Specialty P&C
Dana S. Hendricks
Executive Vice President
and Chief Financial Officer
Noreen L. Dishart
Chief Human Resources Officer
Jeffrey P. Lisenby, Esq.
Executive Vice President,
Corporate Secretary and General Counsel
Edward L. Rand, Jr.
President and Chief Executive Officer
Kevin M. Shook
President
Workers’ Compensation Insurance
2019 Annual Report 5
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, 2019, 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, 2019. 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
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
PERIOD ENDING
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
ProAssurance Corporation
100.00
112.59
144.42
162.39
120.28
110.79
S&P 500 Index
Russell 2000 Index
SNL Insurance P&C
100.00
101.38
113.51
138.29
132.23
173.86
100.00
95.59
115.95
132.94
118.30
148.49
100.00
103.44
122.08
139.58
134.19
157.47
ProAssurance®, Eastern Alliance®, Inova®, Medmarc®, 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 ProAssurance Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2019,
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to .
Commission file number: 001-16533
ProAssurance Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
100 Brookwood Place, Birmingham, AL
(Address of principal executive offices)
(205) 877-4400
(Registrant’s telephone number,
including area code)
63-1261433
(I.R.S. Employer
Identification No.)
35209
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
PRA
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.
No
Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
No
Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted 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 such files). Yes
No
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.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting company
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, 2019 was $1,905,028,296.
As of February 14, 2020, the registrant had outstanding approximately 53,793,370 shares of its common stock.
Documents incorporated by reference in this Form 10-K
(i)
The definitive proxy statement for the 2020 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
AAD
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
E&O
FAL
FASB
FHLB
FHLMC
FIO
FNMA
GAAP
GDPR
GILTI
GNMA
HCPL
IBNR
Inova Re
IRS
LAE
LIBOR
LLC
Lloyd's
LP
Meaning
Annual aggregate deductible
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
Errors and Omissions
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
Medical technology liability
Medical technology and life sciences products liability
3
Term
Model Holding Co. Law
Mortgage Loans
NAIC
NAV
NFIP
NOL
NRSRO
NYDFS
NYSE
OCI
ORSA
OTTI
PCAOB
PDR
PICA
ProAssurance Plan
ProAssurance Savings Plan
Revolving Credit Agreement
ROE
ROU
SAB
SAP
SEC
SPA
SPC
Specialty P&C
Syndicate 1729
Syndicate 6131
Syndicate Credit Agreement
TCJA
TRIA
U.K.
ULAE
VIE
Meaning
Model Insurance and Holding Company System Regulatory Act and Regulation
Two ten-year mortgage loans collectively with an original borrowing amount of
approximately $40 million, each entered into by a subsidiary of ProAssurance
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
Premium deficiency reserve
ProAssurance 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
Right-of-use
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.
Item 6.
Item 7.
Item 7A.
Item 8.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Directors, Executive Officers and Corporate Governance of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
9
20
32
32
32
33
34
35
36
102
105
105
105
105
107
107
107
107
107
108
5
General Information
Throughout this report, references to ProAssurance, “we,” “us,” “our” or the "Company" refer to ProAssurance
Corporation and its consolidated subsidiaries. Because ProAssurance is an insurance holding company and certain terms and
phrases common to the insurance industry are used in this report that carry special and specific meanings, we encourage you to
read the Glossary of Selected Insurance and Related Financial Terms posted on our website on the Investor Relations page
(investor.proassurance.com) under Other Information.
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 pricing or 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;
the effect of cyclical insurance industry trends on our underwriting, including demand and pricing in the
insurance and reinsurance markets in which we operate;
6
uncertainties inherent in the estimate of our loss and loss adjustment expense reserve and reinsurance recoverable;
changes in the availability, cost, quality or collectability of insurance/reinsurance;
the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
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 and other qualified personnel;
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 synergies; 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.
7
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.
8
ITEM 1. BUSINESS
Overview
PART I
ProAssurance Corporation is a holding company for property and casualty insurance companies. For the year ended
December 31, 2019, our net premiums written totaled $843 million, and at December 31, 2019 we had total assets of $4.8
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 Values
Integrity, Leadership, Relationships, Enthusiasm
Our wholly owned insurance subsidiaries provide professional liability insurance for healthcare professionals and
facilities, professional liability insurance for attorneys and their firms, liability insurance for medical technology and life
sciences risks and workers' compensation insurance. We also provide capital to Syndicate 1729 which writes a range of
property and casualty insurance and reinsurance lines. In addition, we are the sole (100%) capital provider of an SPA, Syndicate
6131, which 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 an 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.
9
• 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
innovative programs and solutions that address the specific needs of our customers and return injured workers to
wellness and the dignity of work.
• 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.
• 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.
• 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.
• 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.
• Focus on culture and people. We strive to be the Employer of Choice by attracting, retaining and developing
employees who embody our Mission, Vision and Values.
• Maintain financial stability. We are committed to maintaining financial strength and adequate capital.
Organization and Segment Information
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. We also offer
custom alternative risk solutions including loss portfolio transfers and captive cell programs for healthcare
professional liability insureds. For our alternative market captive cell programs, we cede either all or a portion of
the premium to certain SPCs 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. Alternative market products include program design, fronting, claims administration,
risk management, SPC rental, asset management and SPC management services. Alternative market program
premiums are 100% ceded to either SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited
extent, a captive insurer unaffiliated with ProAssurance.
• Segregated Portfolio Cell Reinsurance - This segment includes the operating results (underwriting profit or loss,
plus investment results) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations. 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 ranges from a low of 20% to a high of 85%. SPC operating results
due to external cell participants are reflected as an SPC dividend expense (income) in our Segregated Portfolio Cell
Reinsurance segment. 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. In
addition, an SPC at Eastern Re assumed an errors and omissions liability policy from a captive insurer unaffiliated
with ProAssurance during 2019. We do not participate in the SPC that assumed this policy; therefore, the operating
results of this policy are reflected in the SPC dividend expense (income).
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• Lloyd's Syndicates - This segment includes the operating results from our participation in Lloyd's of London
Syndicate 1729 and our 100% participation in Syndicate 6131, which is an SPA that underwrites on a quota share
basis with Syndicate 1729. The results of this segment are normally reported on a quarter lag, 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. 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, 2019, 2018 and 2017 were comprised as follows:
($ in thousands)
Specialty P&C (1)
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance (2)
Lloyd's Syndicates (3)
Inter-segment revenues (2)(3)
Total
2019
$ 577,700
278,442
87,140
110,905
(86,697)
$ 967,490
Year Ended December 31
2018
2017
60% $ 577,196
29%
293,230
9%
85,086
11%
(9%)
88,746
(86,947)
100% $ 957,311
60% $ 549,323
31%
9%
264,048
77,675
9%
70,224
(86,394)
100% $ 874,876
(9%)
63%
30%
9%
8%
(10%)
100%
(1) Primarily comprised of one-year term policies, but includes premium related to policies with a two-year term of $26.9 million in 2019,
$22.2 million in 2018 and $27.4 million in 2017.
(2) Premiums in our Segregated Portfolio Cell Reinsurance segment are predominately 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 in 2018 and 2017 by
Syndicate 1729 from our Specialty P&C segment through a previous quota share reinsurance agreement. We eliminate this inter-segment
revenue. There was no premium assumed by Syndicate 1729 from our Specialty P&C segment during 2019.
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 $32.8 million in 2019, $29.3 million in 2018 and $21.3 million in 2017 associated with
insurance exposures outside of the U.S. In addition, we had net written premium of $8.8 million in 2019 associated with
international insurance exposures within our Specialty P&C segment.
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
healthcare entities that, 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, Inova Re
and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance segment. The portion not ceded to the SPCs is
11
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 gross premiums written in this segment in
our alternative market captive cell program were approximately $7.8 million, $5.8 million and $4.3 million during 2019, 2018
and 2017, respectively.
We utilize independent agencies and brokers as well as an internal sales force to write our HCPL business. For the year
ended December 31, 2019, approximately 63% 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 2019, our ten largest agents or
brokers produced approximately 25% 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 and their firms in select areas of practice; and this is a less
significant portion of our business, accounting for approximately 3% of our 2019 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 2019, our top ten largest brokers generated
approximately 40% of our medical technology liability gross written premium, with no one broker representing more than 15%.
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.
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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 or associations
whereby the workers' compensation premium written is 100% ceded to either the SPCs at Inova Re or Eastern Re,
which are reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, a captive insurer
unaffiliated with ProAssurance. 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 97% in 2019 and 95% in 2018 was ceded to the SPCs operated
through Inova Re or Eastern 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. Our Eastern Specialty Risk unit focuses on higher hazard risks
in select industries and generated approximately $3.0 million and $2.7 million of new business in 2019 and 2018, respectively.
We actively seek to reduce our workers' compensation loss costs by placing a concentrated focus on returning injured
workers to wellness and the dignity of work 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 includes the operating results (underwriting profit or loss, plus
investment results) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations. 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 certain SPCs and, for the SPCs in which we participate, our participation interest
is as low as 20% and as high as 85% as of December 31, 2019. Each SPC is operated solely for the benefit of its cell
participants, 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. SPC underwriting results due to external cell participants are reflected as an SPC dividend expense (income) in our
Segregated Portfolio Cell Reinsurance segment. 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 also reflected in the SPC dividend expense (income). The segment operating results reflect our
share of the underwriting and investment results of the SPCs in which we participate. The majority of 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. In addition, an SPC at Eastern Re assumed an errors and omissions
liability policy from a captive insurer unaffiliated with ProAssurance during 2019. We do not participate in the SPC that
assumed this policy; therefore, the operating results of this policy are reflected in the SPC dividend expense (income).
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 lag, 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 investments in and obligations to Syndicate 1729 and Syndicate 6131 consisting of a Syndicate Credit
Agreement, FAL requirements and our participation in operating results. The Syndicate Credit Agreement was issued for the
purpose of providing working capital to Syndicate 1729 with permitted borrowings of £30.0 million. We provide FAL to
support underwriting by Syndicate 1729 and Syndicate 6131 which is comprised of investment securities and cash and cash
equivalents deposited with Lloyd's with a fair value of approximately $137.1 million at December 31, 2019. See further
13
discussion on the Syndicate Credit Agreement and our FAL in Note 3 of the Notes to Consolidated Financial Statements. The
underwriting capacity of Syndicate 1729 and Syndicate 6131 and our respective participation in each is discussed in the
following paragraphs.
Lloyd's Syndicate 1729
We are the largest sole capital provider to Syndicate 1729 with the remaining capital provided by unrelated third parties,
including private names and other corporate members. To reduce our exposure and the associated earnings volatility, we
decreased our participation in the operating results of Syndicate 1729 for the 2020 underwriting year from 61% to 29%.
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 2020 underwriting year has a maximum underwriting capacity of £135 million
(approximately $179 million at December 31, 2019), of which £39 million (approximately $51 million at December 31, 2019)
is our allocated underwriting capacity as a corporate member.
Lloyd's Syndicate 6131
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. As an SPA, Syndicate 6131 is only allowed to underwrite
one quota share reinsurance contract with Syndicate 1729. For the 2020 underwriting year, Syndicate 6131 has a maximum
underwriting capacity of £12 million (approximately $16 million at December 31, 2019).
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.
14
The workers’ compensation industry is highly competitive in the geographic markets in which we operate. New business
opportunities, renewal pricing and retention continue to be a challenge as a result of intense competition, especially from multi-
line insurers that are willing to underprice their workers’ compensation products to offset other coverages and we expect this
trend to continue in 2020. We believe our product offerings allow us to provide flexibility in offering workers’ compensation
solutions to our customers at a competitive price. In addition, we believe that our claims handling and risk management services
are attractive to our customers and provide us with a competitive advantage even when our pricing is higher than our
competitors.
For all of our business, we recognize the importance of providing our products at competitive rates, but we do not price
our products at rates that will not permit us to meet our long-term profit targets over the life of the insurance cycle. We base our
rates on current loss projections, maintaining a long-term focus even when this approach may reduce our top line growth and
result in us not meeting profit targets during certain phases of the insurance cycle. 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
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person that controls a domestic insurer. Because of these regulatory requirements, any party seeking to acquire control of
ProAssurance or any other domestic insurance company, whether directly or indirectly, would usually be required to obtain
such approvals.
In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a
change in control of a non-domestic insurance company admitted in that state. While such pre-acquisition notification statutes
do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the
issuance of a cease and desist order with respect to the non-domestic admitted insurers doing business in the state if certain
conditions exist, such as undue market concentration.
Insurance Regulation Concerning Cybersecurity
In March 2017, 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.
Alabama enacted the Alabama Data Breach Notification Act of 2018 effective June 1, 2018, Ohio enacted the Data
Protection Act effective November 2, 2018 and South Carolina enacted the South Carolina Department of Insurance Data
Security Act effective January 1, 2019. Nevada enacted the Nevada Privacy of Information Collected on the Internet from
Consumers Act effective October 1, 2019, amending its previous law which was effective October 1, 2017. New York enacted
the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act) on October 23, 2019 which broadened the scope of
existing breach notification and data protection laws. Additionally, California's Consumer Privacy Act of 2018 went into effect
January 1, 2020 and Michigan's Data Security Act will go into effect January 20, 2021. These state laws 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.
Moreover, we expect to see privacy laws similar to the California Consumer Privacy Act of 2018 and the Nevada Privacy of
Information Collected on the Internet from Consumers Act to be enacted in other states, including our states of domicile. We do
not expect compliance with the various data security or data privacy acts to have a material impact on our financial condition or
results of operations, as they closely resemble the NAIC Model Law, the NYDFS Cybersecurity Regulations and the California
Consumer Privacy Act of 2018.
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
16
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, 2019, all of
ProAssurance’s insurance subsidiaries exceeded the minimum required risk-based capital levels.
In late 2010, the NAIC adopted the Model Holding Co. Law. The Model Holding Co. Law, as compared to previous
NAIC guidance, increases regulatory oversight of and reporting by insurance holding companies, including reporting related to
non-insurance entities, and requires reporting of risks affecting the holding company group. Additionally, in 2012 the NAIC
adopted ORSA, which requires insurers to maintain a framework for identifying, assessing, monitoring, managing and reporting
on the “material and relevant risks” associated with the insurer's (or insurance group's) current and future business plans. ORSA
requires larger insurers, generally those with annual written premium volume greater than $1 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, 2019, 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 for the years ended December 31, 2019 or 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.
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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,
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 which has
subsequently received multiple short-term extensions and currently expires in September 2020. We cannot predict whether the
proposals will be adopted or extended 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 to 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.
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Terrorism Risk Insurance Act
TRIA, initially enacted in 2002 and reauthorized in 2007, 2015 and 2019 ensures the availability of insurance coverage
for certain acts of terrorism, as defined in the legislation. The 2019 reauthorization extended the program through 2027. TRIA
currently provides that during 2020 and in any year thereafter a loss event must exceed $200 million to trigger coverage and
that the federal government will reimburse 80% of an insurer’s losses in excess of the insurer’s deductible, up to the maximum
annual federal liability of $100 billion. TRIA requires that we offer terrorism coverage to our commercial policyholders in our
workers' compensation line of business, for which we may, when warranted, charge an additional premium. The policyholders
may or may not accept such coverage.
International
Cayman Islands
Our SPC business operates through our subsidiaries, Inova Re and Eastern Re, which are organized and licensed as
Cayman Islands unrestricted Class B insurance companies. Inova Re and Eastern Re are subject to regulation by the CIMA.
Applicable laws and regulations govern the types of policies that Inova Re and Eastern 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. Inova
Re and Eastern 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.
On January 31, 2020, the U.K. withdrew from the European Union, commonly referred to as "Brexit", and entered a
transition period lasting until December 31, 2020. During the transitional period the U.K. and the European Union will
negotiate their future relationship and European Union law will continue to apply in and to the U.K. The effects of Brexit will
depend in part on any agreements the U.K. makes to retain access to European Union markets either during the transitional
period or more permanently. Until the transitional period is over, Lloyd's is 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. Lloyd's Brussels is Lloyd's first Europe wide
operation and brings Lloyd's expertise closer to its customers and partners in Europe. Lloyd's Brussels is also in the process of
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, 2019, we had 961 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 our ERM program 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.
The cyclicality in the property and casualty insurance industry could have a material adverse effect on our ability to improve or
maintain underwriting profits or to grow or maintain premium volume.
The insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price
competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted more favorable
premium levels. An increase in premium levels is often offset by an increasing supply of insurance and reinsurance capacity,
either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which
may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy
terms and fewer submissions for our underwriting services. In addition to these considerations, changes in the frequency and
severity of losses may affect the cycles of the insurance and reinsurance markets significantly. During soft markets, it could be
very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. If we are not
successful in maintaining rates or achieving rate increases, it may be difficult for us to improve or maintain underwriting
profits. Conversely, during hard markets, rising prices may pressure retention levels.
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. In
addition, the program currently expires at the end of 2027, and the failure to extend the program could adversely affect our
business through increased exposure to a catastrophic level of terrorism losses.
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Insurance companies are not permitted to reserve for a catastrophe until it has occurred. Although we purchase
reinsurance protection for risks we believe bear a significant level of catastrophe exposure, actual losses resulting from a
catastrophic event or events may exceed our reinsurance protection. Furthermore, for significant catastrophic exposure, the
inability or unwillingness of the reinsurer to make timely payments under the terms of the reinsurance agreement could impact
our liquidity. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse
effect on our financial position, results of operations and liquidity.
Our results of operations and financial condition may be affected if actual insured losses differ from our loss reserves or if
actual amounts recoverable under reinsurance agreements differ from our estimated recoverables.
We establish reserves as balance sheet liabilities, representing our estimates of amounts needed to resolve reported and
unreported losses and pay related loss adjustment expenses. Our largest liability is our reserve for losses and loss adjustment
expenses. Due to the size of our reserve for losses and loss adjustment expenses, even a small percentage adjustment to our
reserve can have a material effect on our results of operations for the period in which the change is made.
The process of estimating loss reserves is complex. Significant periods of time may elapse between the occurrence of an
insured loss, the reporting of the loss by the insured and payment of that loss. Ultimate loss costs, even for claims with similar
characteristics, can vary significantly depending upon many factors including but not limited to the nature of the claim,
including whether the claim is an individual or a mass tort claim, the personal situation of the claimant or the claimant’s family,
the outcome of jury trials, the legislative and judicial climate where the insured event occurred, general economic conditions
and, for claims involving bodily injury, the trend of healthcare costs. Consequently, the loss cost estimation process requires
actuarial skill and the application of judgment and such estimates require periodic revision. As part of the reserving process, we
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, for certain of our reinsurance agreements, we estimate premiums ceded to the
reinsurer, subject to certain maximums and minimums, 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 (e.g., underwriting, pricing, claims, reserving, reinsurance and catastrophe risk) and to maintain a
competitive advantage. The modeled outputs and related analyses from both proprietary and third parties are subject to various
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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. Changes in the social, judicial or economic environments
in which we operate may make modeled outcomes less reliable or produce new, non-modeled risks. 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. If actual losses exceed assumptions that were made
when our products were priced or our models fail to appropriately estimate the risks we are exposed to, our business, financial
condition, results of operations or liquidity may be adversely affected. Furthermore, our results may be adversely affected if
actual losses exceed assumptions that were made when pricing products that also include features such as an option to purchase
extended reporting endorsement or "tail" coverage, which are offered at rates that are tied to expiring premiums charged. 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.
We are exposed to and may face adverse developments involving mass tort claims arising from coverages provided to our
insureds.
Establishing reserves for mass tort claims is subject to uncertainties due to many factors, including expanded theories of
liability, geographical location and jurisdiction of the lawsuits. Moreover, it is difficult to estimate our ultimate liability for such
claims due to evolving judicial interpretations of various tort theories of liability and defense theories, such as federal
preemption and joint and several liability, as well as the application of insurance coverage to these claims.
If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear increased risk or reduce
the level of our underwriting commitments.
As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk
underwritten by our insurance 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.
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The following table presents the claims paying ratings of our core insurance subsidiaries as of February 14, 2020.
ProAssurance Indemnity Company, Inc.
ProAssurance Casualty Company
ProAssurance Specialty Insurance Company, Inc.
ProAssurance Insurance Company of America (2)
Noetic Specialty Insurance Company
Medmarc Casualty Insurance Company
Lloyd's Syndicate 1729 and Syndicate 6131 (3)
Eastern Alliance Insurance Company
Allied Eastern Indemnity Company
Eastern Advantage Assurance Company
Inova Re Ltd., SPC
Eastern Re Ltd., SPC
(1) NR indicates that the subsidiary has not been rated by the listed rating agency.
A.M. Best
(www.ambest.com)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A+ (Superior)
A (Excellent)
A+ (Superior)
A+ (Superior)
A+ (Superior)
NR
NR
Rating Agency (1)
Fitch
(www.fitchratings.com)
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
A3
A3
NR
NR
NR
(2) Effective December 31, 2019, PACO Assurance Company, Inc. merged into ProAssurance Insurance Company of America, formerly known
as Podiatry Insurance Company of America.
(3) Rating provided is the rating applicable to all Lloyd's syndicates.
In addition to the evaluation of our claims paying ability, four rating agencies (A.M. Best, S&P, Fitch and Moody’s)
evaluate and rate our ability to service current debt and potential debt. These financial strength ratings reflect each agency’s
independent evaluation of our ability to meet our obligation to holders of our debt, if any. While these ratings may be of greater
interest to investors than our claims-paying ratings, these are not ratings of our equity securities nor a recommendation to buy,
hold or sell our equity securities.
Our business could be adversely affected by the loss or consolidation of independent agents, agencies, 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.
23
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, 2019 our receivable from reinsurers on unpaid losses and loss adjustment expenses was $391 million,
and our receivable from reinsurers on paid losses and loss adjustment expenses was $13 million. As of December 31, 2019, no
reinsurer, on an individual basis, had an estimated net amount due which exceeded $40 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.
Our investments are subject to credit, prepayment and other risks.
A significant portion of our total assets ($3.4 billion or 71%) at December 31, 2019 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, 2019 approximately 15% 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, 2019 the fair value of our state/municipal portfolio was $296.1 million (amortized cost basis of $287.7
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. Due to the decrease in U.S.
corporate tax rates, 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
24
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 the decrease in U.S. corporate tax rates, 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, 2019 the carrying value of our tax credit partnership
interests was approximately $48.5 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, 2019 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, 2019, we valued approximately 16% 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, 2019, approximately
70% 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, 2019, 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).
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 include financial
covenants, 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.
In November 2019, we executed an amendment to our Revolving Credit Agreement which extended the expiration to
November 2024 and increased the permitted borrowings from $250 million to $300 million. There were no changes to the
financial covenants of the agreement which require that our consolidated debt to capital ratio (0.16 to 1.0 at December 31,
2019) be 0.35 to 1.0 or less and that we maintain a minimum net worth of $1 billion which represents 65% of consolidated
shareholders' equity, excluding AOCI, determined as of June 30, 2019.
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.
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.
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.
25
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
now designate changes in the OIS rate as the hedged risk in hedges of interest rate risk for fixed-rate financial instruments.
We have exposure to LIBOR-based financial instruments through our variable rate Mortgage Loans and Revolving Credit
Agreement; however, these agreements include provisions for an alternative benchmark rate if LIBOR ceases to exist which do
not materially change our liability exposure. Additionally, we have exposure to LIBOR in our fixed maturities portfolio which
represented approximately 3% of our total investments, or $102 million, as of December 31, 2019. We are currently working
with our external asset managers to assess the transition state of our variable LIBOR rate fixed maturity investments; however,
70% of these investments with exposure to LIBOR were issued during 2019 and include provisions for an alternative
benchmark rate. At this time, we cannot predict the overall effect of the modification or discontinuation of LIBOR or the
establishment of alternative benchmark rates.
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, 2019 we had a net deferred tax asset of
approximately $44.4 million and a net federal income tax receivable of approximately $8.0 million, which included a liability
for unrecognized current tax benefits of $5.1 million.
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
26
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 was enacted in July 2010 and established additional regulatory oversight of financial institutions.
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.
27
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, 2019. 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, 2019, 2018 and 2017. Unfavorable business,
economic or regulatory conditions in any of these states could have a disproportionately greater effect on us than they would if
we were less geographically concentrated.
From time to time we may identify opportunities for growth through acquisitions. However, approval of acquisitions may not be
granted or conditions of approval may adversely alter the expected value and benefits of the acquisition. In addition, expected
benefits from acquisitions may not be achieved or may be delayed longer than expected.
Growth through the acquisition of other companies or books of business is opportunistic and sporadic. If we are able to
identify a target for acquisition, state insurance regulation concerning change or acquisition of control could delay or prevent us
from completing the acquisition. State insurance regulatory codes provide that the acquisition of “control” of a domestic insurer
or of any person that directly or indirectly controls a domestic insurer cannot be consummated without the prior approval of the
domiciliary insurance regulator. There is no assurance that we will receive such approval from the respective insurance
regulator or that such approvals will not be conditioned in a manner that materially and adversely affects the aggregate
economic value and business benefits expected to be obtained and cause us to not complete the acquisition.
The Company performs thorough due diligence before agreeing to a merger or acquisition; however, there is no guarantee
that the procedures we perform will adequately identify all potential weaknesses or liabilities of the target company or potential
risks to the consolidated entity.
There is also no guarantee that businesses acquired in the future will be successfully integrated. Ineffective integration of
our businesses and processes may result in substantial costs or delays and adversely affect our ability to compete. The process
of integrating an acquired company or business can be complex and costly and may create unforeseen operating difficulties and
expenditures. Potential problems that may arise include but are not limited to: business disruption, loss of customers and
employees, the ineffective integration of underwriting, claims handling and actuarial practices, an increase in the inherent
uncertainty of reserve estimates for a period of time until stable trends reestablish themselves within the combined organization,
diversion of management time and resources to acquisition integration challenges, the cultural challenges associated with
integrating employees, increased operating costs, assumption of greater than expected liabilities or inability to achieve cost
savings or synergies.
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.
28
Our business could be affected by the loss of one or more of our senior executives or other qualified personnel.
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."
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.
29
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 withdrawal from the European Union could have a material effect on our operations.
As previously described in Part I under the heading "Insurance Regulatory Matters", the U.K. withdrew from the
European Union on January 31, 2020, commonly referred to as "Brexit", and entered a transitional period lasting until
December 31, 2020. During the transitional period, the U.K and the European Union will negotiate their future relationship and
European Union law will continue to apply in and to the U.K. The 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 (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 2019, 2018 or 2017. Our practice is to accrue for insurance insolvencies when notified of
assessments. We are not able to reasonably estimate assessments or develop a meaningful range of possible assessments prior to
notice because the guaranty funds do not provide sufficient information for development of such estimates or ranges.
Certain states in which we write workers’ compensation insurance have established administrative and/or second injury
funds that levy assessments against insurers that write business in their state. The assessments are generally based on an
insurer’s proportionate share of premiums or losses in a particular state, and the assessment rate can vary from year to year.
Risk pooling mechanisms have been established in certain states that offer insurance coverage to individuals or entities
who are otherwise unable to purchase coverage from private insurers. Authorized property and casualty insurers in these states
are generally required to share in the underwriting results of these pooled risks, which are typically adverse. Should our
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 2019, 2018 or 2017.
30
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 $0.31 per share dividend for
the three months ended December 31, 2019. 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.
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
31
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.
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
each encumbered by a ten-year mortgage loan 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.
32
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
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.
Edward L. Rand, Jr. Mr. Rand was appointed as our Chief Executive Officer in 2019 and has served as President since
2018. Mr. Rand previously served as Chief Operating Officer, Chief Financial Officer, Executive
Vice President and Senior Vice President since joining ProAssurance in 2004. Mr. Rand also has
previously served as President of our Medmarc subsidiary from 2016 to 2018. Prior to joining
ProAssurance, Mr. Rand was 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 53)
Michael L. Boguski
Dana S. Hendricks
Jeffrey P. Lisenby
Kevin M. Shook
Mr. Boguski was promoted to President of our Specialty P&C segment in 2019. Mr. Boguski
previously served as President of our Eastern subsidiary since ProAssurance acquired Eastern in
2014. Prior to the acquisition of Eastern, Mr. Boguski served as President and Chief Executive
Officer of Eastern since 2011 and had been with the Eastern organization since its inception in
1997. Mr. Boguski has almost 34 years of insurance industry experience. (Age 57)
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 52)
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 51)
Mr. Shook is President of our Eastern subsidiary. Mr. Shook previously served as Executive Vice
President of our Eastern subsidiary and has been with Eastern for 16 years. Mr. Shook has over 26
years of insurance industry experience, including 10 years with PricewaterhouseCoopers where he
primarily served companies within the insurance industry. Mr. Shook is a Certified Public
Accountant. (Age 50)
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.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
33
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
At February 14, 2020, ProAssurance Corporation had 3,177 stockholders of record and 53,793,370 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*
2019
2018
High
45.36
39.92
40.67
41.40
Low
34.61
34.71
36.26
35.93
$
$
$
$
Dividends Declared
2019
0.31
0.31
0.31
0.31
2018
0.31
0.31
0.31
0.81
$
$
$
$
$
$
$
$
$
$
$
$
High
56.00
48.20
49.40
46.28
Low
47.35
35.35
35.50
37.18
$
$
$
$
Dividends Paid
2019
0.81
0.31
0.31
0.31
2018
5.00
0.31
0.31
0.31
$
$
$
$
$
$
$
$
$
$
$
$
* Includes a special dividend of $0.50 per common share declared in 2018.
The Board declared a quarterly dividend in each quarter of 2019 and 2018. Each dividend was paid in the month
following the quarter in which it was declared. The Board also declared a special dividend of $0.50 per common share during
the fourth quarter of 2018 which was paid in January of 2019. 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, 2019.
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)
521,365
—
(b)
$—
—
Number of securities
remaining available
for future issuance
under equity compensation
plans (excluding securities reflected
in column (a))
(c)
*
1,760,814
—
* No outstanding options as of December 31, 2019. Other outstanding share units have no exercise price.
34
Issuer Purchases of Equity Securities
Period
October 1 - 31, 2019
November 1 - 30, 2019
December 1 - 31, 2019
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)
2019
2018
2017
2016
2015
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
$
$
$
$
$
$
$
$
$
$
$
967,490
847,532
93,269
$
$
$
957,311
818,853
91,884
$
$
$
(10,061) $
59,874
$
$
$
$
$
$
$
9,220
999,834
753,915
1,004
0.02
0.02
53,740
53,841
8,948
$
(43,488) $
$
9,833
$
$
$
$
$
886,030
593,210
47,057
0.88
0.88
53,598
53,749
$
$
$
$
$
$
$
$
$
$
$
874,876
738,531
95,662
8,033
16,409
7,514
866,149
469,158
107,264
2.01
2.00
53,393
53,611
835,014
733,281
100,012
$
$
$
812,218
694,149
108,660
(5,762) $
$
34,875
$
$
$
$
$
$
7,808
870,214
443,229
151,081
2.84
2.83
53,216
53,448
3,682
(41,639)
7,227
772,079
410,711
116,197
2.12
2.11
54,795
55,017
$ 3,390,409
$ 3,349,382
$ 3,686,528
$ 3,925,696
$ 3,650,130
$ 4,805,599
$ 4,600,726
$ 4,929,197
$ 5,065,181
$ 4,906,021
$ 2,346,526
285,821
$
$ 2,119,847
287,757
$
$ 2,048,381
411,811
$
$ 1,993,428
448,202
$
$ 2,005,326
347,858
$
$ 3,293,686
$ 3,077,724
$ 3,334,402
$ 3,266,479
$ 2,947,667
$ 1,511,913
$ 1,523,002
$ 1,594,795
$ 1,798,702
$ 1,958,354
Common stock outstanding, period end
53,792
53,637
53,457
53,251
$
28.11
$
28.39
$
30.00
$
34.00
$
37.00
53,101
(1) For all periods presented, debt is shown net of unamortized debt issuance costs which prior to 2016 were reported as a part of other
assets.
35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion generally focuses on the change in financial condition, results of operation and cash flows for
the year ended December 31, 2019 as compared to the year ended December 31, 2018 and be should be read in conjunction
with the Consolidated Financial Statements and Notes to those statements which accompany this report. For a full discussion of
the changes in the financial condition, results of operations and cash flows for the year ended December 31, 2018 as compared
to the year ended December 31, 2017, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of ProAssurance's December 31, 2018 report on Form 10-K.
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 and their firms, liability insurance for medical technology and life sciences risks and workers'
compensation insurance. We also provide capital to Syndicate 1729 and are the sole (100%) 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. Descriptions of
ProAssurance's five operating and reportable segments are 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. We
also offer custom alternative risk solutions including loss portfolio transfers, assumed reinsurance and captive cell
programs for healthcare professional liability insureds. For our alternative market captive cell programs, we cede
either all or a portion of the premium to certain SPCs 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. Alternative market program premiums are 100% ceded to either SPCs in our
Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer.
• Segregated Portfolio Cell Reinsurance - This segment includes the operating results (underwriting profit or loss,
plus investment results) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations. 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 ranges from a low of 20% to a high of 85%. SPC operating results
attributable to external cell participants are reflected as an SPC dividend expense (income) in our Segregated
Portfolio Cell Reinsurance segment. 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. In addition, an SPC at Eastern Re assumed an errors and omissions liability policy from a captive insurer
unaffiliated with ProAssurance during 2019. We do not participate in the SPC that assumed this policy; therefore,
the operating results of this policy are reflected in the SPC dividend expense (income).
• Lloyd's Syndicates - This segment includes the operating results from our participation (61% for the 2019
underwriting year) in Lloyd's of London Syndicate 1729 and our 100% participation in Syndicate 6131, which is an
SPA that underwrites on a quota share basis with Syndicate 1729. To reduce our exposure and the associated
earnings volatility, we decreased our participation in the operating results of Syndicate 1729 for the 2020
underwriting year from 61% to 29%. The results of this segment are normally reported on a quarter lag, 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
36
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. This segment also
includes non-premium revenues generated outside of our insurance entities and corporate expenses.
Additional information regarding our segments is included in Note 17 of the Notes to Consolidated Financial Statements,
Part I and in the Segment Operating Results sections that follow.
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 (53% in 2019) 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. Since the middle of 2019, new senior leadership in our Specialty P&C segment has executed a comprehensive
underwriting strategy in response to emerging loss trends and changing conditions in the HCPL industry. This includes
organizational structure enhancements, recruitment of additional talent in specialty underwriting, price strengthening and
tightening of underwriting criteria, terms and conditions. Furthermore, the new senior leadership team for our Specialty P&C
segment executed several strategic business decisions intended to improve operating performance by bringing together all of
the Specialty P&C segment lines of business and operations under a unified organizational and management structure.
We believe our position in the healthcare liability space is strengthened by our ability to offer synergistic solutions
through our operations at Eastern, a provider of workers' compensation insurance which currently represents the second largest
product line in our gross premiums written (28% in 2019, 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 product offerings
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.
We provide capital to Lloyd's of London Syndicate 1729 and Syndicate 6131 which represents 11% of our gross
premiums written in 2019. As previously discussed, to reduce our exposure and the associated earnings volatility, we decreased
our participation in the operating results of Syndicate 1729 for the 2020 underwriting year from 61% to 29%. Our allocated
share of Syndicate 1729's maximum underwriting capacity for 2020 is £39 million (approximately $51 million at December 31,
2019). We continue to provide 100% of the capital to Syndicate 6131 which has a maximum underwriting capacity for the 2020
underwriting year of £12 million (approximately $15.9 million at December 31, 2019).
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.
37
Key Performance Measures
We are committed to disciplined underwriting, pricing and loss reserving practices as well as conservative investment
practices, even during difficult market conditions. We are also committed to maintaining prudent operating and financial
leverage. 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 and loss adjustment expenses 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 (benefit) 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 long-term ROE of 700 basis points above the 10-year U.S. Treasury rate, which
at December 31, 2019 was approximately 8.9%.
Our emphasis on rate adequacy, selective underwriting, effective claims management and prudent investments is a key
factor in our ability to achieve our long-term ROE target. We closely monitor premium revenues, losses and loss adjustment
expenses, 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.
38
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. We can make 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, 2019 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 and social 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. For claims-made
policies, 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. 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 2019 and 2018 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 (see further discussion that follows under the heading "Uses of
Judgment"). 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.
39
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
may occur, general economic and social trends and, for claims involving bodily injury, the trend of healthcare costs. Within our
Specialty P&C segment, for our HCPL business (76% of our consolidated gross reserve for losses and loss adjustment expenses
as of December 31, 2019), we set an initial reserve based upon our evaluation of the current loss environment including
frequency, severity, economic inflation, social inflation and legal trends. The initial loss ratio for our HCPL business has ranged
from 87% to 106% in recent years. We have recently trended towards the higher end of this range due to increased reserve
estimates for a large national healthcare account that far exceeded the assumptions we made when originally underwriting the
account as well as increases in loss severity in the broader HCPL industry, including our excess and surplus lines of business.
See further discussion on our current accident year net loss ratio in our Segment Operating Results - Specialty Property &
Casualty section that follows under the heading "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, 2019).
The risks insured in our medical technology liability business (3% of our consolidated gross reserve for losses and loss
adjustment expenses as of December 31, 2019) 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 (10% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31,
2019) including but not limited to the type and severity of the injury, the age, health 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 payroll exposure base. 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 Inova Re and Eastern Re (4% of our
consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2019) are consistent with that of our
Workers’ Compensation Insurance and Specialty P&C segments, respectively.
Lloyd's Syndicates Segment. Initial reserves for Syndicate 1729 and Syndicate 6131 are primarily recorded using the loss
assumptions by risk category incorporated into each Syndicate's business plan submitted to Lloyd's with consideration given to
loss experience incurred to date (4% of our consolidated gross reserve for losses and loss adjustment expenses as of
December 31, 2019). The assumptions used in each business plan are consistent with loss results reflected in Lloyd's historical
data for similar risks. The loss ratios may 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.
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.
40
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:
Paid Development Method
• Bornhuetter-Ferguson (Paid and Reported) Method
•
• Reported (Incurred) Development Method
• Average Paid Value Method
• Average Reported Value 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 (Incurred) Development Methods. These methods use historical, cumulative losses (paid
losses for the Paid Development Method, reported losses for the Reported (Incurred) 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 (Incurred) 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.
The Adjusted Reported and the Adjusted Paid Methods. These methods are based on the premise that the relative change
in a given accident year's adjusted reported loss estimates (Adjusted Reported Method) or adjusted paid losses (Adjusted Paid
Method) from one evaluation point to the next is similar to changes observed for earlier accident years at the same evaluation
points. In the Adjusted Reported Method reported loss estimates are adjusted to reflect a common case reserve adequacy basis.
In the Adjusted Paid Method, the historical paid loss experience is adjusted to reflect a common claim settlement rate basis. We
principally use these methods to evaluate reserves for our legal liability coverages.
Generally, methods such as the Bornhuetter-Ferguson Method are used on more recent accident years where we have less
data on which to base our analysis. As time progresses and we have an increased amount of data for a given accident year, we
begin to give more confidence to the development and average methods, as these methods typically rely more heavily on our
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.
41
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 (Incurred) 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 was
amortized over the average expected life of the reserve of 6 years. The fair value adjustment has been fully amortized as of
December 31, 2019.
Use of Judgment
The process of estimating reserves involves a high degree of judgment and is subject to a number of variables. These
variables can be affected by both views of internal and external events, such as changes in views of economic inflation, legal
trends and legislative changes, as well as differentiating views of individuals involved in the reserve estimation process, among
others. We continually refine our estimates in a regular, ongoing process as historical loss experience develops and additional
claims are reported and settled. Our objective is to consider all significant facts and circumstances known at the time.
We use various actuarial methods in the process of setting reserves. 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.
HCPL. Over the past several years the most influential factor affecting the analysis of our HCPL reserves and the related
development recognized has been an observed increase in claim severity for the broader HCPL industry as well as higher initial
loss expectations on incurred 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 severity trends in the
range of 2% to 5% depending on state, territory and specialty. In some portions of our HCPL business we have observed and
reflected higher severity trends in our estimates of losses and loss adjustment expenses.
If the severity trend were to be higher by 1 percentage point, the impact would be an increase in our initial 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 initial 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
42
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 early 2017 to December 31, 2019, the average charged premium rates on our standard physician renewal
business have increased by approximately 4% per annum, and we anticipate further rate increases due to indications of
increasing loss severity.
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 $11.8 million for the year ended December 31, 2019, of which $10.1
million related to our Segregated Portfolio Cell Reinsurance segment and $7.8 million related to our Workers' Compensation
Insurance segment, partially offset by net unfavorable reserve development of $5.7 million and $0.4 million related to our
Specialty P&C and Lloyd's Syndicates segments, respectively.
Net favorable reserve development recognized within our Segregated Portfolio Cell Reinsurance segment primarily
reflected better than expected claim trends in the 2015 through 2018 accident years. The improved claim trends reflected lower
frequency and severity than anticipated at the time the reserves were established.
Net favorable reserve development recognized within our Workers' Compensation Insurance segment reflected overall
favorable trends in claim closing patterns primarily in the 2015 and 2016 accident years.
Net unfavorable reserve development of $5.7 million in our Specialty P&C segment was driven by $51.5 million of
unfavorable reserve development recognized in 2019 related to our reserves for the previously mentioned large national
healthcare account that has experienced losses far exceeding the assumptions we made when underwriting the account,
beginning in 2016. Excluding the unfavorable reserve development related to this account, the Specialty P&C segment
recognized favorable reserve development totaling $45.8 million in 2019 which included favorable reserve development in our
medical technology liability line of business of $12.8 million. Net favorable reserve development in 2018 of $77.0 million
included $13.3 million and $10.9 million attributable to our medical technology liability and legal professional liability lines of
business, respectively. While the majority of our reserves in our Specialty P&C segment continue to develop favorably, the
favorable development we recognized, excluding the large national healthcare account, was lower as compared to 2018, in part
due to the observed increase in claim severity in the broader HCPL industry. See further discussion in our Segment Operating
Results - Specialty Property & Casualty section that follows under the heading "Losses."
Net unfavorable development recognized within our Lloyd's Syndicates segment was driven by higher than expected
losses and development on certain large claims which resulted in unfavorable development with respect to a previous year of
account. See further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows.
43
Loss Development by Line of Business
Professional Liability
Our professional liability line of business includes both our HCPL and legal professional lines, with our HCPL line
representing the largest component of our reserve. In support of our concern that the decline in frequency will result in a higher
severity trend for our HCPL claims, we saw our closed-with-indemnity-payment ratio (i.e., the number of claims closed with an
indemnity or loss payment as compared to the total number of closed claims) for our claims increase from 10% in 2005 to 18%
in 2019.
The following table presents additional information about the loss development for our professional liability line of
business:
($ in thousands)
2019
2018
2017
Accident Years
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Prior to 2010
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2019
512,638
516,785
438,847
405,034
367,663
335,433
359,089
379,772
373,439
375,783
7,532,378
Reserve
Development
(favorable)
unfavorable
N/A
69,518
$
35,591
$
$
1,848
$ (27,495)
$ (17,412)
$ (12,799)
(9,173)
$
(4,343)
$
$
(4,686)
$ (12,543)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
25.3%
N/A
46.9%
N/A
67.8% $
13,637
82.1% $
10,648
89.6% $
(1,268)
93.9% $ (16,627)
96.9% $ (20,398)
98.7% $ (13,403)
98.9% $ (13,940)
99.3% $
(4,268)
$ (18,174)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
N/A
18.0%
N/A
46.4%
3,413
66.4% $
80.8% $
1,510
89.4% $ (15,782)
94.7% $ (23,164)
97.4% $ (17,187)
97.8% $ (18,277)
99.1% $ (17,224)
$ (22,508)
% of Known
Claims
Closed
N/A
N/A
20.4%
48.2%
68.7%
82.3%
90.4%
95.3%
96.4%
98.7%
During 2019 the loss experience in our HCPL excess and surplus lines of business deteriorated further, particularly in
regard to the reserves we established for a large national healthcare account, as previously discussed. This deterioration is the
primary driver of the unfavorable development we recognized in 2019 for accident years 2016-2018. During the years ended
December 31, 2018 and 2017, reflection of higher severity trends in certain HCPL lines of business also resulted in increases of
estimated ultimate losses for open claims for earlier accident years, which resulted in a lower amount of favorable development
recognized in 2018 and 2017 as compared to earlier years.
This can be seen in looking at both the absolute amount of 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, 2019, 2018
and 2017 with respect to the three then most recent prior accident years:
($ in millions)
Prior accident years
2019
2016-2018
2018
2015-2017
2017
2014-2016
Net favorable (unfavorable) development
recognized for the specified years
Development as a % of established ultimates,
prior calendar year end
$
(107.0)
$
(23.0)
$
(8.5%)
(2.0%)
10.9
0.9%
44
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)
2019
2018
2017
Accident Years
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Prior to 2010
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2019
13,909
12,249
12,063
11,223
9,283
10,148
5,021
8,505
9,141
23,502
553,844
Reserve
Development
(favorable)
unfavorable
N/A
$
$
$
$
$
$
$
$
$
$
(1,856)
(2,166)
(1,249)
(1,548)
(1,823)
(291)
(1,362)
(467)
(828)
(1,175)
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
13.4%
68.2%
85.6% $
65.9% $
85.8% $
94.3% $
98.7% $
99.2% $
99.6% $
99.8% $
$
N/A
N/A
(695)
(1,114)
(1,511)
(1,526)
(1,526)
585
(5,273)
1,449
(3,680)
N/A
52.4%
72.2%
62.8% $
64.6% $
93.2% $
98.7% $
98.8% $
99.8% $
99.6% $
$
N/A
N/A
N/A
(537)
(1,755)
(187)
(2,622)
(1,251)
92
(1,385)
(2,428)
N/A
N/A
42.2%
53.3%
79.5%
92.5%
96.4%
96.9%
73.9%
96.3%
Approximately $6.8 million of the $12.8 million total net favorable development recognized in 2019 related to the 2014 to
2017 accident years. The development for the 2014 to 2017 accident years represents a 13.7% reduction to the ultimates
established for those reserves at December 31, 2018. 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 $10.1 million total net favorable development recognized in 2017 related to the 2012 to 2015 accident years. The
development for the 2012 to 2015 accident years represents a 12.1% reduction to the ultimates established for those reserves at
December 31, 2016.
In 2019, 2018 and 2017 the development was largely attributable to favorable results from claims closed during the year.
As time has elapsed we have recognized that actual loss experience has on average been better than estimated. We have been
cautious in recognizing the improvement, but as claims have matured and claims are closed or have become more certain for
the remaining open claims, we have revised reserve estimates. We believe the need for a cautious approach is required as
outcomes are uncertain and results can be significantly affected by outcomes for a small number of cases.
45
Workers' Compensation
Claims in our workers’ compensation line of business have historically closed at a faster rate than in our HCPL or medical
technology liability lines of business. This faster disposition rate, along with a lower net retention after the application of
reinsurance, has resulted in less volatility in loss estimates on a net basis. However, a change in the number of individually-
severe claims can create volatility in a given accident year. The following table presents additional information about the loss
development for our workers' compensation line of business:
($ in thousands)
2019
2018
2017
Accident Years
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
Prior to 2010
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2019
168,257
159,188
134,119
114,223
123,074
120,948
115,698
94,803
90,967
71,519
401,898
Reserve
Development
(favorable)
unfavorable
N/A
(2,561)
(4,349)
(8,923)
(2,128)
(363)
2,405
(72)
(134)
(305)
40
$
$
$
$
$
$
$
$
$
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
(4,203)
(8,257)
(1,998)
(92)
(227)
(565)
(60)
(54)
(11)
43.0%
81.8%
91.4% $
95.2% $
96.9% $
98.9% $
99.4% $
99.7% $
99.5% $
99.6% $
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
N/A
(7,546)
(5,773)
(1,428)
441
(308)
241
(42)
1,710
N/A
40.0%
80.8%
91.8% $
95.3% $
98.4% $
99.2% $
99.5% $
99.3% $
99.4% $
$
% of Known
Claims
Closed
N/A
N/A
37.0%
82.5%
92.4%
97.0%
98.3%
99.3%
99.0%
99.4%
In 2019, we recognized $10.1 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment
and $7.8 million of net favorable development in our Workers' Compensation Insurance segment. 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 each of the years ended December 31, 2019, 2018 and 2017, net favorable
development in our Workers' Compensation Insurance segment included $1.6 million related to the amortization of the purchase
accounting fair value adjustment. As previously discussed, this fair value adjustment has been fully amortized as of December
31, 2019.
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
$1.479 billion
Carried Net Reserve
$1.956 billion
High End Point
$2.517 billion
$1.649 billion
$1.956 billion
$2.263 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, as was the case in 2019, 2018 and 2017.
46
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, stability and claims payment practices.
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, 2019, 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, 2019; however, reinsurers may periodically dispute our demand for reimbursement from them
based upon their interpretation of the terms of our agreements. As of December 31, 2019, reinsurance recoverables totaling
approximately $92.6 million were collateralized by letters of credit or funds withheld. We had no allowance for credit losses
related to our reinsurance receivables at December 31, 2019 or 2018 as all reinsurance balances were considered collectible. No
reinsurance balances were written off for credit reasons during the years ended December 31, 2019 and 2018, and reinsurance
balances written off for credit reasons during the year ended December 31, 2017 were nominal in amount. 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.
47
Investment Valuations
We record the majority of our investments at fair value as shown in the table below. At December 31, 2019, 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
16%
69%
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.
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, we classify securities valued using an exchange-traded price as Level 1
securities.
Level 2 Investments
Most fixed income securities do not trade daily; 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, we classify securities valued based on multiple market observable inputs as
Level 2 securities.
48
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. In accordance with GAAP, we classify securities valued using limited observable inputs as Level 3
securities.
Fair Values Not Categorized
We hold interests in certain investment funds, primarily LPs/LLCs, which measure fund assets at fair value on a recurring
basis and provide us with a NAV for our interest. As a practical expedient, we consider the NAV provided to approximate the
fair value of the interest. In accordance with GAAP, we do not categorize these investments within the fair value hierarchy.
Nonrecurring Fair Value Measurements
We measure the fair value of certain assets on a nonrecurring basis 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, fixed assets, goodwill and other intangible assets. These assets would also include any
equity method investments that do not provide a NAV.
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, 2019, 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
48.5
39.8
88.3
66.1
Equity
Equity
Cash surrender value
Total investments - Other valuation methodologies
$
157.3
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;
49
• 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.
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 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 typically at the
segment level each reporting period or in a manner that is consistent with the way we manage our business. Any amounts
estimated to be unrecoverable are charged to expense in the current period.
As part of our evaluation of the recoverability of DPAC, we also evaluate our unearned premiums for premium
deficiencies. A premium deficiency is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized
DPAC and maintenance costs, net of anticipated investment income, exceeds the related unearned premium. If a premium
deficiency is identified, the associated DPAC is written off, and a PDR is recorded for the excess deficiency as a component of
net losses and loss adjustment expenses in our Consolidated Statement of Income and Comprehensive Income and as a
50
component of the reserve for losses on our Consolidated Balance Sheet. For the year ended December 31, 2019, a nominal
amount of DPAC was charged to expense as it was determined to be unrecoverable, and a $9.2 million PDR was established in
our Specialty P&C segment related to a large national healthcare account. See further discussion on the PDR in the Segment
Operating Results - Specialty Property & Casualty section that follows. No amounts were determined to be unrecoverable for
the year ended December 31, 2018.
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 reserves, unearned and advanced premiums, DPAC, compensation related items,
unrealized investment gains (losses) and basis differences on fixed assets, intangible assets and operating leases. 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 was established in a prior year against 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.
We also established a valuation allowance in a prior year against the deferred tax assets of certain SPCs at our recently formed
wholly owned Cayman Islands reinsurance subsidiary, Inova Re. Due to the limited operations of these recently formed SPCs,
management concluded that a valuation allowance was required. As of December 31, 2019, management concluded that a
valuation allowance was still required against the deferred tax assets related to the NOL carryforwards for the U.K. operations
and against the deferred tax assets of certain SPCs at Inova Re. See further discussion in Note 6 of the Notes to Consolidated
Financial Statements.
Tax Cuts and Jobs Act
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 Inova Re, one of our wholly owned Cayman Islands reinsurance subsidiaries, 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 for the year
ended December 31, 2019. See further discussion on 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. We recognized a nominal amount of tax expense for the GILTI provision of the TCJA
during year ended December 31, 2019.
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
51
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 2019 or 2018. At December 31, 2019, our
liability for unrecognized tax benefits approximated $5.1 million.
Goodwill
Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in
Note 17 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, if applicable.
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.
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 of the most recent goodwill impairment test performed on October 1, 2019, we elected to perform a qualitative
goodwill impairment test for our Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance
reporting units. Each of these reporting units have historically had an excess of fair value over book value and based on current
operations are expected to continue to do so; therefore, our annual impairment test for these reporting units was performed
qualitatively. In applying the qualitative approach, management considered macroeconomic factors, industry and market
conditions, cost factors that could have a negative impact on the reporting units, actual financial performance of the reporting
units versus expectations and management's future business expectations. As a result of the qualitative assessments,
management concluded that it was not more likely than not that the fair value of each of our three reporting units that have
goodwill was less than the carrying value of each reporting unit as of the testing date; therefore, no further impairment testing
was required. No goodwill impairment was recorded in 2019, 2018 or 2017.
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. Additional information regarding our intangible assets is included in Note 1 of the Notes to Consolidated Financial
Statements.
52
Leases
During the first quarter of 2019, we adopted ASU 2016-02, which requires us to make certain estimates and assumptions
in applying the requirements of this new guidance. We are involved in a number of leases, primarily for office facilities. We
determine if an arrangement is a lease at the inception date of the contract and classify all leases as either financing or
operating. As of December 31, 2019, all of our leases were classified as operating. Operating lease ROU assets and operating
lease liabilities are recognized as of the lease commencement date based on the present value of the remaining lease payments,
discounted over the term of the lease using a discount rate determined based on information available as of the commencement
date. The ROU asset represents the right to use the underlying asset (office space) for the lease term. As the majority of our
lessors do not provide an implicit discount rate, we use our collateralized incremental borrowing rate in determining the present
value of remaining lease payments. For leases entered into or reassessed after the adoption of ASU 2016-02, we account for
lease and non-lease components of a contract as a single lease component.
We evaluate our operating lease ROU assets for impairment at the asset group level whenever events or changes in
circumstances indicate that the carrying amount of the asset group may not be recoverable. The carrying amount of an asset
group, which includes the operating lease ROU asset and the related operating lease liability, is not recoverable if the carrying
amount exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group over the life of the
primary asset in the asset group. That assessment is based on the carrying amount of the asset group, including the operating
lease ROU asset and the related operating lease liability, at the date it is tested for recoverability and an impairment loss is
measured and recognized as the amount by which the carrying amount of the asset group exceeds its fair value. Any impairment
loss is allocated to each asset in the asset group, including the operating ROU asset.
When a lease of an office facility is to be abandoned and will not be subleased, we first evaluate whether or not the
operating lease ROU asset’s inclusion in an existing asset group continues to be appropriate and if the commitment to abandon
the lease constitutes a change in circumstances requiring the operating lease ROU asset, or the larger asset group, to be tested
for impairment. If an impairment test is required, it is performed in the same manner as discussed above. Any remaining
carrying value of the operating lease ROU asset is amortized from the date we commit to a plan to abandon the lease to the
expected date that we will cease to use the leased property. Leases to be abandoned in which we have the intent or practical
ability to sublease continue to be accounted for under a held and use model, with no change to the amortization period of the
operating lease ROU asset, and are evaluated for impairment as a separate asset group at the date the sublease is executed.
Additional information regarding our leases is included in Note 1 and Note 10 of the Notes to Consolidated Financial
Statements.
Audit Premium
Workers’ compensation premiums are determined based upon the payroll of the insured, respective premium rates and,
where applicable, an experience-based modification factor. An audit of the policyholders’ records is conducted after policy
expiration to make a final determination of applicable premiums. Audit premium due from or due to a policyholder as a result
of an audit is reflected in net premiums 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 2019. We are not aware of any accounting changes not yet adopted as of December 31, 2019 that
would have a material effect on our results of operations, financial position or cash flows. Note 1 of the Notes to Consolidated
Financial Statements provides additional detail regarding accounting changes not yet adopted.
53
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, 2019, we held cash and liquid investments of approximately $280 million outside
our insurance subsidiaries that were available for use without regulatory approval or other restriction, of which $17 million was
used to pay shareholder dividends in January 2020. We also have $250 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 discussed in this section under the heading "Debt." As of February 14, 2020, no borrowings were outstanding
under our Revolving Credit Agreement.
During 2019, our operating subsidiaries paid dividends to us of approximately $123 million, including extraordinary
dividends from our insurance subsidiaries of approximately $20 million. Our insurance subsidiaries, in the aggregate, are
permitted to pay dividends of approximately $88 million over the course of 2020 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)
2019
2018
Change
Year Ended December 31
Net cash provided (used) by:
Operating activities
Investing activities
Financing activities
Increase (decrease) in cash and cash equivalents
$
$ 148,166
$ 177,265
50,522
(103,790)
94,898
$
$
(29,099)
(164,375)
214,897
(446,186)
342,396
(54,024) $ 148,922
(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)
The principal components of our operating cash flows are the excess of premiums collected and net investment income
over losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the
payment of losses associated with the premiums. Premiums are generally collected within the twelve-month period after the
policy is written, while our claim payments are generally paid over a more extended period of time. Likewise, timing delays
exist between the payment of claims and the collection of any associated reinsurance recoveries.
The decrease in operating cash flows in 2019 as compared to 2018 of $29.1 million was primarily due to an increase in
paid losses of $30.2 million, a decrease in cash received from investment income of $9.8 million and an increase in cash paid
for operating expenses of $8.1 million. The increase in paid losses was driven by our Specialty P&C and Workers'
Compensation Insurance segments. The increase in paid losses in our Specialty P&C segment primarily reflected higher
average claims payments in 2019 as compared to 2018 and the increase in paid losses in our Workers' Compensation Insurance
segment primarily reflected the timing of loss payments between periods. The decrease in cash received from investment
income was primarily due to a decline in distributed earnings from our unconsolidated subsidiaries. The increase in cash paid
for operating expenses was driven by an increase in brokerage expenses in our Lloyd's Syndicates segment from the continuing
54
growth of Syndicate 6131 as well as an increase in fees associated with a data analytics services agreement entered into during
the fourth quarter of 2018 in our Specialty P&C segment. In addition, the decrease in operating cash flows reflected a decrease
in net cash received of $3.0 million associated with the cash settlement from the commutation of the 2017 and 2016 calendar
year quota share reinsurance arrangements between our Specialty P&C segment and Syndicate 1729 due to the reduction in
premiums ceded to Syndicate 1729. The decrease in operating cash flows was partially offset by an increase in net premium
receipts of $19.0 million and a decrease in estimated tax payments of $3.0 million. The increase in net premium receipts was
primarily due to the growth in written premium in our Lloyd's Syndicates and Specialty P&C segments.
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
2018. 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.
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 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 Balance Sheets
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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5
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 were cautious in giving full recognition to indications that the pace of severity increase had slowed, however we
gave measured recognition of the improved trend in our reserve estimates. 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 gave stronger recognition to the lower severity trend as time
elapsed and a greater percentage of claims were 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.
• Beginning in 2017, we identified potential higher severity trends in the broader HCPL industry. These trends were also
reflected in increases in estimates of ultimate losses for open HCPL claims for earlier accident years, which resulted in
a lower amount of favorable development recognized in 2018 and 2017 as compared to prior years.
• During 2019 the loss experience in our HCPL excess and surplus lines of business deteriorated further, particularly in
regard to the reserves we established for a large national healthcare account that has experienced losses far exceeding
the assumptions we made when underwriting the account, beginning in 2016. As a result, we strengthened our HCPL
reserves through the recognition of net unfavorable development on prior accident years and a higher current accident
year net loss ratio in our Specialty P&C segment in 2019 as discussed more fully in our Segment Operating Results -
Specialty Property and Casualty section that follows.
57
Activity in our net reserve for losses during 2019, 2018 and 2017 is summarized below:
Balance, beginning of year
(In thousands)
2019
2,119,847
$
2018
2017
$
2,048,381
$
1,993,428
Less reinsurance recoverables on unpaid losses and
loss adjustment expenses
Net balance, beginning of year
343,820
1,776,027
335,585
1,712,796
273,475
1,719,953
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
765,698
685,326
603,518
(11,783)
753,915
(115,133)
(458,991)
(574,124)
1,955,818
(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
390,708
343,820
335,585
$
2,346,526
$
2,119,847
$
2,048,381
* Current year net losses in 2019 included a PDR of $9.2 million associated with the unearned premium of a
large national healthcare account in our Specialty P&C segment (see Note 7 of the Notes to Consolidated
Financial Statements). 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 of the Notes to Consolidated
Financial Statements).
At December 31, 2019 our gross reserve for losses included case reserves of approximately $1.5 billion and IBNR
reserves of approximately $0.9 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 certain 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 Inova Re or Eastern Re, our Cayman Islands reinsurance subsidiaries which are
reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, an unaffiliated captive insurer. During
2019 and 2018, we wrote total alternative market premium of approximately $90.0 million and $90.2 million, respectively. The
majority of these policies ($86.7 million and $85.1 million in 2019 and 2018, respectively) are reinsured to the SPCs at Inova
Re or Eastern Re, net of a ceding commission. Each SPC at Inova Re and Eastern 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
58
degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest ranges from a low of
20% to a high of 85%. SPC operating results due to external cell participants are reflected as an SPC dividend expense
(income) 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 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. The nominal
portion of the risk that is not ceded to an SPC is retained in our Specialty P&C segment and 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 $2.4 million and $4.5 million in 2019 and 2018, respectively, was 100%
ceded to a single unaffiliated captive insurer in 2019 and to two unaffiliated captive insurers in 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, 2019, 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 $40 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. Our
healthcare professional liability treaty renewed October 1, 2019 at a higher rate than the previous agreement, partially offset by
a lower intermediary compensation rate. Our medical technology liability treaty renewed January 1, 2020 at a lower rate than
the previous agreement. Our workers' compensation treaty renewed May 1, 2019 at a lower rate than the previous agreement;
however, the lower rate reflects the addition of an AAD and the elimination of the return premium component of the contract.
The significant coverages provided by our current excess of loss reinsurance agreements are detailed in the following table.
59
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.
(3) Includes an AAD where retention is the greater of $3.9M or 2.1% of subject premium in annual losses otherwise
recoverable in excess of the $500k retention per loss occurrence.
Large healthcare 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, as well as with certain insurance agencies that produce business for us.
Other Reinsurance Arrangements
For the workers' compensation business ceded to Inova Re and Eastern Re, each SPC has in place its own reinsurance
arrangements; which are illustrated in the following table.
60
Segregated Portfolio Cell Reinsurance
Per Occurrence Coverage
Aggregate Coverage
(1) The attachment point is based on a percentage of written premium within individual
cells (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. As previously
discussed, we participate in certain SPCs to a varying degree. 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 collateral,
typically in the form of 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, an 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.
• 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
61
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, 2019
there were no material reserves established for corporate legal actions.
Investing Activities and Related Cash Flows
Our investments at December 31, 2019 and December 31, 2018 are comprised as follows:
($ in thousands)
Fixed maturities, available for sale:
December 31, 2019
December 31, 2018
Carrying
Value
% of Total
Investment
Carrying
Value
% of Total
Investment
U.S. Treasury obligations
$
110,467
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
17,340
296,093
1,340,364
208,408
80,089
236,024
2,288,785
47,284
2,336,069
250,552
339,907
66,112
358,820
38,949
$ 3,390,409
3% $
1%
120,201
35,354
9%
293,772
40% 1,223,475
6%
181,238
2%
44,101
7%
195,657
68% 2,093,798
1%
38,188
69% 2,131,986
7%
10%
2%
11%
442,937
308,319
64,096
367,757
1%
34,287
100% $ 3,349,382
4%
1%
9%
37%
5%
1%
6%
63%
1%
64%
13%
9%
1%
11%
2%
100%
62
At December 31, 2019, 99% of our investments in available-for-sale fixed maturity securities were rated, and the average
rating was A+. The distribution of our investments in available-for-sale fixed maturity securities by rating were as follows:
($ in thousands)
December 31, 2019
December 31, 2018
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
$
677,554
84,991
152,118
153,377
182,966
338,697
171,553
182,041
155,935
52,523
130,929
6,101
$ 2,288,785
30% $
3%
7%
7%
8%
15%
7%
8%
7%
2%
5%
645,300
101,328
120,801
155,352
190,595
311,036
146,721
133,199
118,864
50,466
100,447
1%
19,689
100% $ 2,093,798
31%
5%
6%
7%
9%
15%
7%
6%
6%
2%
5%
1%
100%
*Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright ©2020, S&P Global Market
Intelligence
A detailed listing of our investment holdings as of December 31, 2019 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 $80 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 14,
2020, $300 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 11 of the Notes to Consolidated Financial Statements.
At December 31, 2019, our FAL was comprised of fixed maturity securities with a fair value of $129.9 million and cash
and cash equivalents of $7.2 million deposited with Lloyd's. See further discussion in Note 3 of the Notes to Consolidated
Financial Statements.
Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately
94% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average
effective duration of our fixed maturity securities at December 31, 2019 was 2.96 years; the weighted average effective duration
of our fixed maturity securities combined with our short-term securities was 2.58 years.
63
The carrying value and unfunded commitments for certain of our investments were as follows:
($ in thousands, except expected funding period)
December 31, 2019 December 31, 2018
Unfunded
Commitment
Expected funding
period in years
Carrying Value
December 31, 2019
Qualified affordable housing project tax credit
partnerships (1)
Historic tax credit partnerships (2)
All other investments, primarily investment fund
LPs/LLCs
Total
$
$
46,421 $
2,085
65,677
$
3,757
847
276
310,314
358,820 $
298,323
367,757
$
164,227
165,350
6
1
4
(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, 2019, we had investments in 37 separate
investment funds with a total carrying value of $310.3 million 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, 2019 or 2018.
Financing Activities and Related Cash Flows
Treasury Shares
Treasury share activity for 2019, 2018 and 2017 was as follows:
Treasury shares at the beginning of the period
(In thousands)
Shares reissued, primarily those reissued pursuant to the ProAssurance 2011
Employee Stock Ownership Plan, had a fair value of approximately $1 million in
both 2019 and 2018 and approximately $2 million in 2017
Treasury shares at the end of the period
2019
2018
2017
9,352
9,368
9,409
(27)
9,325
(16)
9,352
(41)
9,368
We did not repurchase any common shares subsequent to December 31, 2019 and as of February 14, 2020 our remaining
Board authorization was approximately $110 million.
Shareholder Dividends
Our Board declared cash dividends during 2019, 2018 and 2017 as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fourth Quarter - Special dividend
Quarterly Cash Dividends Declared, per Share
2019
2018
2017
$
$
$
$
$
0.31
0.31
0.31
$
$
$
0.31
$
— $
0.31
0.31
0.31
0.31
0.50
$
$
$
$
$
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 $93 million,
$316 million and $315 million were paid during the years ended December 31, 2019, 2018 and 2017, 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.
64
Debt
At December 31, 2019, 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. On November 7,
2019, we executed an amendment to our Revolving Credit Agreement which extended its expiration from June 2020 to
November 2024 and increased the permitted borrowings from $200 million to $250 million. In addition to the permitted
borrowings of $250 million, our Revolving Credit Agreement has available a $50 million accordion feature, which, if
successfully subscribed, would expand permitted borrowings up to $300 million. At December 31, 2019, there were no
outstanding borrowings on our Revolving Credit Agreement and we are in compliance with the financial covenants of the
Revolving Credit Agreement.
We have Mortgage Loans with one lender in connection with the recapitalization of two office buildings, which mature in
December 2027. The Mortgage Loans accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on
a quarterly basis. At December 31, 2019, the outstanding balance of the Mortgage Loans was approximately $38 million and we
are in compliance with the financial covenant of the Mortgage Loans.
Additional information regarding our debt is provided in Note 11 of the Notes to Consolidated Financial Statements.
We utilize 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 12 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
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, 2019 was as follows:
(In thousands)
Total
Losses and loss adjustment expenses
$ 2,346,526
$
Debt obligations including interest and fees
Operating lease obligations
349,509
25,213
Payments due by period
Less than
1 year
629,799
16,446
4,146
1-3 years
3-5 years
$
917,935
$
433,644
$
32,907
6,995
268,035
4,113
More than
5 years
365,148
32,121
9,959
Funding commitments primarily related to non-
public investment entities
205,121
137,924
63,136
3,994
67
Total
$ 2,926,369
$
788,315
$ 1,020,973
$
709,786
$
407,295
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, 2019, 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 November 2024. Additionally, we presume the current interest rate
on our Mortgage Loans at December 31, 2019 will remain constant until maturity of the Mortgage Loans in December 2027.
For more information regarding these agreements see Note 11 of the Notes to Consolidated Financial Statements.
65
We are involved in a number of operating leases primarily for office facilities. Office facility leases have remaining lease
terms ranging from one year to thirteen years. The above table includes the remaining future minimum lease payments
including imputed interest for operating leases that had an initial or remaining non-cancellable lease term in excess of one year
as of December 31, 2019. In addition, the above table excludes total future minimum lease payments of $1.5 million for an
eleven year lease signed but not yet commenced as of December 31, 2019. Additional information regarding our leases is
included in Note 1 and Note 10 of the Notes to Consolidated Financial Statements.
Our funding commitments are primarily related to non-public investment entities but also include the unused commitment
under our Syndicate Credit Agreement as we presume it will be fully advanced within the next year for purposes of the
disclosure in the table above. The above table excludes a short-term loan commitment where we have agreed to advance funds
on a 30 day basis. For more information regarding these agreements see Note 9 of the Notes to Consolidated Financial
Statements.
66
Results of Operations - Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Selected consolidated financial data for each period is summarized in the table below.
($ in thousands, except per share data)
2019
2018
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 cell dividend expense (income)
Interest expense
Total expenses
$ 842,725
$ 834,914
$ 847,532
$ 818,853
$
$
83,208
59,874
9,220
999,834
753,915
253,508
4,579
16,636
1,028,638
100,832
(43,488)
9,833
886,030
593,210
238,556
9,122
16,117
857,005
7,811
28,679
(17,624)
103,362
(613)
113,804
160,705
14,952
(4,543)
519
171,633
Income (loss) before income taxes
(28,804)
29,025
(57,829)
Income tax expense (benefit)
(29,808)
(18,032)
(11,776)
Net income
Non-GAAP operating income (loss)
Earnings per share:
Basic
Diluted
Non-GAAP operating earnings (loss) per share:
Basic
Diluted
Net loss ratio
Underwriting expense ratio
Combined ratio
Operating ratio
Effective tax rate
Return on equity
$
$
$
$
$
$
$
$
$
$
$
$
1,004
(43,779)
0.02
0.02
(0.81)
(0.81)
89.0%
29.9%
118.9%
107.9%
103.5%
0.1%
47,057
$ (46,053)
79,527
$ (123,306)
0.88
0.88
1.48
1.48
$
$
$
$
72.4 %
29.1 %
101.5 %
90.3 %
(62.1%)
3.0 %
(0.86)
(0.86)
(2.29)
(2.29)
16.6 pts
0.8 pts
17.4 pts
17.6 pts
165.6 pts
(2.9) pts
In all tables that follow, the abbreviation "nm" indicates that the information or the percentage change is not meaningful.
67
Executive Summary of Operations
The following sections provide an overview of our consolidated and segment results of operations for the year ended
December 31, 2019 as compared to 2018. See the Segment Operating Results sections that follow for additional information
regarding each segment's operating results. For a discussion of the changes in the financial condition, results of operations and
cash flows for the year ended December 31, 2018 as compared to the year ended December 31, 2017, please refer to Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations" section of ProAssurance's
December 31, 2018 report on Form 10-K.
Revenues
The following table shows our consolidated and segment net premiums earned:
($ in thousands)
2019
2018
Change
Year Ended December 31
Net Premiums Earned
Specialty P&C
$ 499,058
$ 491,787
$
Workers' Compensation Insurance
189,240
186,079
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Consolidated total
78,563
80,671
73,940
67,047
$ 847,532
$ 818,853
$
7,271
3,161
4,623
13,624
28,679
1.5%
1.7%
6.3%
20.3%
3.5%
Consolidated net premiums earned for the years ended December 31, 2019 and 2018 included the effects of two different
loss portfolio transfers in our Specialty P&C segment which resulted in $2.7 million and $26.6 million, respectively, of one-
time premium written and fully earned in the respective periods. See further discussion of these loss portfolio transfers in our
Segment Operating Results - Specialty Property & Casualty section that follows. After removing the impacts of the 2019 and
2018 loss portfolio transfers, consolidated net premiums earned increased $52.6 million during 2019 as compared to 2018. All
of our operating segments contributed to the remaining increase in consolidated net premiums earned, particularly our Specialty
P&C segment due to the pro rata effect of an increase in the volume of written premium during the preceding twelve months,
predominantly in our physicians and healthcare facilities lines of business, driven by an increase in renewal pricing.
The following table shows our consolidated net investment result:
Net investment income
($ in thousands)
Equity in earnings (loss) of unconsolidated subsidiaries
Net investment result
Year Ended December 31
2019
$ 93,269
(10,061)
$ 83,208
2018
$ 91,884
8,948
$ 100,832
Change
$
1,385
(19,009)
$ (17,624)
1.5%
(212.4%)
(17.5%)
The decrease in our consolidated net investment result in 2019 as compared to 2018 was primarily attributable to a
decrease in earnings (loss) from our unconsolidated subsidiaries, somewhat offset by an increase in net investment income.
Equity in earnings (loss) of unconsolidated subsidiaries includes our share of the operating results of interests we hold in certain
LPs/LLCs as well as operating losses associated with our tax credit partnership investments, which are designed to generate
returns in the form of tax credits and tax-deductible project operating losses. During 2019, the earnings generated from our LPs/
LLCs did not exceed the operating losses recorded from our tax credit partnership investments resulting in an overall loss from
investments in unconsolidated subsidiaries as compared to earnings from investments in unconsolidated subsidiaries in 2018.
The decrease in earnings generated from our LPs/LLCs in 2019 was driven by lower reported earnings from two LP
investments, somewhat offset by lower operating losses from our tax credit partnership investments. The increase in net
investment income in 2019 was primarily due to an increase in interest earned on our FAL in our Lloyd's Syndicate segment
due to a higher average balance in 2019 as compared to 2018. Our FAL primarily includes investment-grade corporate debt
securities deposited with Lloyd's.
68
The following table shows our total consolidated net realized investment gains (losses):
($ in thousands)
2019
2018
Change
Year Ended December 31
Net impairment losses recognized in earnings
$
(751) $
Other net realized investment gains (losses)
Net realized investment gains (losses)
60,625
$ 59,874
(490) $
(261)
103,623
$ (43,488) $ 103,362
(42,998)
(53.3%)
241.0%
237.7%
During 2019, we recognized OTTI in earnings of $0.8 million and non-credit OTTI in OCI of $0.2 million, both of which
related to three corporate bonds in the energy and consumer sectors. We recognized OTTI in earnings of $0.5 million during
2018 related to debt instruments from two issuers in the energy sector. Other net realized investment gains during 2019 was
driven by changes in the fair value of our equity trading portfolio. See further discussion in our Segment Operating Results -
Corporate section that follows.
Expenses
The following table shows our consolidated and segment net loss ratios and net loss development:
($ in millions)
2019
2018
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
90.3%
105.5%
68.4%
79.6%
58.2%
89.0%
106.7%
64.3%
66.7%
58.7%
83.7%
93.8%
68.0%
64.5%
74.0%
72.4%
78.2%
63.7%
52.4%
76.9%
6.6 pts
11.7 pts
0.4 pts
15.1 pts
(15.8) pts
16.6 pts
28.5 pts
0.6 pts
14.3 pts
(18.2) pts
Favorable (unfavorable) net loss development, prior
accident years
Consolidated
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
$
$
$
$
$
11.8
(5.7)
7.8
10.1
(0.4)
$
$
$
$
$
92.1
77.0
8.0
9.0
(2.0)
$
$
$
$
$
(80.3)
(82.7)
(0.2)
1.1
1.6
69
The primary drivers of the increase in our consolidated current accident year net loss ratio for the year ended
December 31, 2019 as compared to 2018 were as follows:
Estimated ratio increase (decrease) attributable to:
(In percentage points)
Change in actuarial adjustments related to the current accident year
reserve in our Specialty P&C segment
Change in DDR reserve adjustment
E&O reserve impact
PDR
All other, net
Increase in the consolidated current accident year net loss ratio
Increase (Decrease)
2019 versus 2018
3.4 pts
1.7 pts
1.2 pts
1.1 pts
(0.8) pts
6.6 pts
As a result of actuarial analyses performed by both internal and consulting actuaries during 2019 and 2018, we increased
our current accident year net loss ratio in our Specialty P&C segment in both 2019 and 2018; however, the adjustment was
greater in 2019 as compared to 2018 which accounted for 3.4 percentage points of the increase in our consolidated current
accident year net loss ratio. This increase in 2019 was driven by increased reserve estimates for a large national healthcare
account and, to a lesser extent, in our broader HCPL excess and surplus lines of business. In addition, the higher consolidated
current accident year net loss ratio reflected changes to our reserve in our Specialty P&C segment related to DDR coverage
endorsements as well as a PDR of $9.2 million, which accounted for 1.7 and 1.1 percentage points, respectively, of the increase.
The PDR represents an estimated premium deficiency associated with the aforementioned large national healthcare account
which is reflected as a component of current accident year net losses in 2019 (see further discussion in our Segment Operating
Results - Specialty Property & Casualty section that follows). Furthermore, the increase in our consolidated current accident
year net loss ratio also reflected a $10 million reserve that an SPC at Eastern Re established during 2019 associated with an
assumed E&O liability policy in our Segregated Portfolio Cell Reinsurance segment which accounted for 1.2 percentage points
of the increase. We do not participate in the SPC that assumed this policy; therefore, these losses are the obligation of the
external cell participants and are reflected in the SPC dividend expense (income), which is an offset to expenses, and thus has
no effect on our consolidated net income or Segregated Portfolio Cell Reinsurance segment net operating results for 2019 (see
further discussion in our Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows).
In both 2019 and 2018, our consolidated calendar year net loss ratio was lower than our consolidated current accident year
net loss ratio due to the recognition of consolidated net favorable prior year reserve development, as shown in the previous
table. Consolidated net favorable prior year reserve development in 2019 was lower than in 2018 driven by unfavorable
development recognized in our Specialty P&C segment of $5.7 million in 2019 as compared to favorable development of $77.0
million recognized in 2018. The unfavorable development recognized in our Specialty P&C segment in 2019 was driven by
$51.5 million of unfavorable prior year reserve development related to the previously mentioned large national healthcare
account that has experienced losses far exceeding the assumptions we made when underwriting the account, beginning in 2016.
Excluding the unfavorable development related to this account, our Specialty P&C segment recognized favorable prior year
reserve development totaling $45.8 million in 2019.
Our consolidated and segment underwriting expense ratios were as follows:
Underwriting Expense Ratio
Consolidated
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Corporate*
Year Ended December 31
2019
2018
Change
29.9%
24.1%
30.4%
30.9%
43.0%
2.3%
29.1%
22.9%
29.9%
30.3%
47.3%
2.3%
0.8 pts
1.2 pts
0.5 pts
0.6 pts
(4.3) pts
— pts
*There are no net premiums earned associated with the Corporate segment. Ratios shown are the contribution of the
Corporate segment to the consolidated ratio (Corporate operating expenses divided by consolidated net premiums earned).
Our consolidated underwriting expense ratio increased for the year ended December 31, 2019 as compared to 2018 due to
the effect of a loss portfolio transfer (net premiums earned with minimal associated operating expenses) entered into during
70
2018 in our Specialty P&C segment (see further discussion in our Segment Operating Results - Specialty Property & Casualty
section that follows). Excluding the impact of the 2018 loss portfolio transfer, our consolidated underwriting expense ratio for
2019 was relatively unchanged as compared to 2018 driven by an increase in consolidated net premiums earned which outpaced
the increase in consolidated DPAC amortization, offset by an increase operating expenses in our Specialty P&C segment driven
by fees associated with a data analytics services agreement entered into during the fourth quarter of 2018.
Taxes
Our effective tax rates for the years ended December 31, 2019 and 2018 were as follows:
($ in thousands)
Income (loss) before income taxes
Income tax expense (benefit)
Net income
Year Ended December 31
2019
$ (28,804)
(29,808)
1,004
$
2018
29,025
(18,032)
47,057
$
$
Change
$ (57,829)
(11,776)
$ (46,053)
200.8 %
39.5 %
(4,587.0%)
Effective tax rate
103.5%
(62.1%)
165.6 pts
We recognized an income tax benefit in both 2019 and 2018; however, the comparability of our effective tax rates is
impacted by the pre-tax loss recognized in 2019 as compared to pre-tax income recognized in 2018.
Our effective tax rates for the years ended December 31, 2019 and 2018 were different from the statutory federal income
tax rates in effect for each year primarily due to the recognition of a tax benefit from credits transferred to us from our tax credit
partnership investments and, to a lesser extent, portions of our income that are exempt from federal income taxes. See further
discussion, including other notable items during 2019 and 2018 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 provides the combined effect of
underwriting profitability and investment income. Our operating ratio for the years ended December 31, 2019 and 2018 was as
follows:
Combined ratio
Less: investment income ratio
Operating ratio
Year Ended December 31
2019
118.9%
11.0%
107.9%
2018
Change
101.5%
11.2%
90.3%
17.4 pts
(0.2) pts
17.6 pts
Our operating ratio for the year ended December 31, 2019 as compared to 2018 increased by approximately 17.6
percentage points driven by a higher combined ratio in our Specialty P&C segment. The higher combined ratio in our Specialty
P&C segment was driven by a higher current accident year net loss ratio and the recognition of net unfavorable development on
prior accident year reserves. See previous discussion in this section under the heading "Expenses" and further discussion in our
Segment Operating Results - Specialty Property & Casualty section that follows under the heading "Losses."
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, 2019
and 2018 was as follows:
ROE
Year Ended December 31
2019
2018
0.1%
3.0%
Change
(2.9) pts
The decrease in our ROE in 2019 as compared to 2018 was due to the decrease in net income, driven by a higher
combined ratio in our Specialty P&C segment, as discussed above under the heading "Operating Ratio", largely offset by the
increase in the fair value of our equity trading portfolio due to the improvement in the market since December 31, 2018.
71
Book Value per Share
Book value per share is calculated as total shareholders' equity at the balance sheet date divided by the total number of
common shares outstanding. This ratio measures the net worth of the Company to shareholders' on a per share basis. Our book
value per share at December 31, 2019 as compared to December 31, 2018 is shown in the following table.
Book Value Per Share at December 31, 2018
Increase (decrease) to book value per share during the year ended
December 31, 2019 attributable to:
Book Value Per
Share
$
28.39
Dividends declared
Net income
OCI
Other *
Book Value Per Share at December 31, 2019
$
(1.24)
0.02
1.00
(0.06)
28.11
* Includes the impact of cumulative effect adjustments related to ASUs adopted during 2019
and the impact of share-based compensation.
72
Non-GAAP Financial Measures
Non-GAAP operating income (loss) is a financial measure that is widely used to evaluate performance within the
insurance sector. In calculating Non-GAAP operating income (loss), 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 (loss) 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 (loss):
Net income
(In thousands, except per share data)
Items excluded in the calculation of Non-GAAP operating income (loss):
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, at 21% (2)
After-tax effect of exclusions
Non-GAAP operating income (loss)
Per diluted common share:
Net income
Effect of exclusions
Non-GAAP operating income (loss) per diluted common share
Year Ended December 31
2019
2018
$
1,004
$
47,057
(59,874)
3,144
43
(56,687)
11,904
(44,783)
(43,779) $
$
0.02
(0.83)
(0.81) $
$
$
$
43,488
(2,535)
148
41,101
(8,631)
32,470
79,527
0.88
0.60
1.48
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell
Reinsurance segment. SPC operating results, including any realized gain or loss, that are attributable to external cell
participants are reflected in 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 attributable to the external cell participants.
(2) The 21% rate is the statutory rate associated with the taxable or tax deductible items listed above. See previous discussion in
this section under the heading "Taxes."
73
Segment Operating Results - Specialty Property & Casualty
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance as
discussed in Note 17 of the Notes to Consolidated Financial Statements. 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
Segment operating results
Year Ended December 31
2019
495,750
499,058
$
$
5,796
(532,485)
(120,310)
(147,941) $
2018
494,148
491,787
5,844
(384,431)
(112,419)
781
$
$
$
$
$
$
Change
1,602
0.3%
7,271
(48)
(148,054)
(7,891)
(148,722)
1.5%
(0.8%)
38.5%
7.0%
(19,042.5%)
Net loss ratio
Underwriting expense ratio
106.7%
24.1%
78.2%
22.9%
28.5 pts
1.2 pts
As a result of actuarial analyses performed by both internal and consulting actuaries during 2019, we concluded that
additional reserves were needed in our Specialty P&C segment. As such, we recorded $5.7 million of net unfavorable
development on our prior accident year reserves and recorded a higher current accident year net loss ratio which resulted in a
net loss ratio of 106.7% in 2019. Furthermore, net losses and loss adjustment expenses for the year ended December 31, 2019
included a $9.2 million PDR which represents an estimated premium deficiency associated with the unearned premium related
to a large national healthcare account. See further discussion that follows under the heading "Losses."
In addition, segment operating results for the years ended December 31, 2019 and 2018 included the effect of two separate
loss portfolio transfers; one entered into during the third quarter of 2019 and one entered into during the second quarter of 2018.
A loss portfolio transfer is a form of retroactive insurance coverage as we are assuming and accepting an entity’s existing open
and future claim liabilities through the transfer of the entity’s loss reserves. The loss portfolio transfer entered into during the
third quarter of 2019 resulted in total net premiums written and earned of $2.7 million (consisting of $0.9 million of retroactive
premium and $1.8 million of prospective (tail) premium) and total net losses and loss adjustment expenses of $2.1 million. The
loss portfolio transfer entered into during the second quarter of 2018 resulted in total net premiums written and earned of $26.6
million (consisting of $18.7 million of retroactive premium and $7.9 million of prospective (tail) premium) and total net losses
and loss adjustment expenses of $25.4 million. See further discussion of these loss portfolio transfers in Note 4 of the Notes to
Consolidated Financial Statements.
Premiums Written
Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of
new business, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by
rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written
through multi-period policies. In addition, premium volume may periodically be affected by shifts in the timing of renewals
between periods. The healthcare professional liability market, which accounts for a majority of the revenues in this segment,
remains challenging as physicians continue joining hospitals or larger group practices and are thus no longer purchasing
individual or group policies in the standard market. In addition, some competitors have chosen to compete primarily on price;
both factors may impact our ability to write new business and retain existing business. Furthermore, the insurance and
reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition due to
excessive underwriting capacity as well as periods when shortages of capacity permitted more favorable premium levels.
Changes in the frequency and severity of losses may affect the cycles of the insurance and reinsurance markets significantly.
During soft markets, it could be very difficult for us to grow or maintain premium volume levels without sacrificing
underwriting profits. Conversely, during hard markets, rising prices may pressure retention levels.
74
Gross, ceded and net premiums written were as follows:
($ in thousands)
Gross premiums written
Less: Ceded premiums written
Net premiums written
2019
$ 577,700
81,950
$ 495,750
Year Ended December 31
2018
Change
$ 577,196
83,048
$ 494,148
$
$
504
(1,098)
1,602
0.1%
(1.3%)
0.3%
Gross Premiums Written
Gross premiums written by component were as follows:
($ in thousands)
2019
2018
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 (9)
Total
$ 367,029
$ 352,279
$
14,750
22,171
374,450
65,014
32,200
26,227
25,579
18,708
542,178
34,528
4,692
19,442
(1,653)
1,962
172
(3,855)
(17,808)
(1,740)
600
4.2%
21.2%
5.2%
(2.5%)
6.1%
0.7%
(15.1%)
(95.2%)
(0.3%)
1.7%
26,863
393,892
63,361
34,162
26,399
21,724
900
540,438
35,128
2,134
490
1,644
335.5%
$ 577,700
$ 577,196
$
504
0.1%
(1) Physician policies were our greatest source of premium revenues in both 2019 and 2018. The increase in twelve month
term policies in 2019 included timing differences of $5.6 million primarily related to the prior year renewal of certain
policies. Excluding the effect of these timing differences, twelve month term policies increased $9.2 million as compared
to 2018. The remaining increase was primarily due to new business written, an increase in exposure related to three
policies written on an excess and surplus lines basis totaling $5.2 million and an increase in renewal pricing, partially
offset by retention losses. Renewal pricing increases in 2019 are reflective of our concern about increases in loss severity.
The lower retention for 2019 is largely attributable to our focus on underwriting discipline, as we continue to emphasize
careful risk selection, rate adequacy and a willingness to walk away from business that does not fit our goal of achieving a
long-term underwriting profit. We anticipate a lower than average level of retention to persist as we continue to reevaluate
certain books of business and set our rates to reflect our observations of higher severity trends. We also offer twenty-four
month term policies to our physician insureds in one selected jurisdiction. The increase in twenty-four month term
policies in 2019 as compared to 2018 primarily reflected the normal cycle of renewals (policies subject to renewal in 2019
were previously written in 2017 rather than in 2018).
(2) Our healthcare facilities premium (which includes hospitals, surgery centers, long-term care facilities and other
miscellaneous healthcare facilities) decreased in 2019 as compared to 2018 due to retention losses, partially offset by new
business written and, to a lesser extent, an increase in renewal pricing. Retention losses in 2019 were driven by our
decision not to renew certain products written on an excess and surplus lines basis after our underwriting evaluation and,
to a lesser extent, the loss of two large policies totaling $1.7 million due to price competition as a result of rate increases.
As we continue to reevaluate certain books of business, we anticipate our retention to remain at a lower than historic level.
Renewal pricing increases in 2019 reflect rate increases where we believe appropriate given the loss environment and loss
indications we are seeing in the healthcare facilities space.
(3) Our other healthcare providers are primarily dentists, chiropractors and allied health professionals. The increase in 2019 is
primarily due to the timing of the prior year renewal of one policy as well as new business written.
75
(4) Our legal professionals policies are primarily individual and small group policies in select areas of practice. Our legal
professionals premium remained relatively unchanged in 2019 as compared to 2018 as new business written and renewal
pricing increases were offset by retention losses. The increase in renewal pricing was primarily the result of an increase in
the rate charged for certain renewed policies in select states due to rate filings.
(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. 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. The amount of tail coverage premium written can vary significantly from period to period. The decrease in
tail premiums in 2019 was driven by $7.9 million of tail coverage provided in connection with a loss portfolio transfer
entered into during the second quarter of 2018, partially offset by $1.8 million of tail coverage provided in connection
with a loss portfolio transfer entered into during the third quarter of 2019.
(6) We offer custom alternative risk solutions including loss portfolio transfers for healthcare entities that, most commonly,
are exiting a line of business, changing an insurance approach or simply preferring to transfer risk. In the third quarter of
2019, we entered into a loss portfolio transfer with a regional hospital group which resulted in $0.9 million of retroactive
premium written and fully earned in 2019. In the second quarter of 2018, we entered into a loss portfolio transfer with a
large healthcare organization which resulted in $18.7 million of retroactive premium written and fully earned in 2018. See
Note 4 of the Notes to Consolidated Financial Statements for further information on these transactions.
(7) Our medical technology liability business is marketed throughout the U.S.; coverage is typically offered on a primary
basis, within specified limits, to manufacturers and distributors of medical technology and life sciences products including
entities conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our
medical technology liability premium is impacted by the sales volume of insureds. The increase in 2019 was primarily
due to new business written and, to a lesser extent, an increase in renewal pricing, largely offset by retention losses.
Renewal pricing increases primarily reflect increases in the sales volume and exposure of certain insureds. Retention
losses in 2019 are primarily attributable to an increase in competition on terms and pricing.
(8) Certain components of our gross premiums written include alternative market premiums in our captive cell program. We
cede either all or a portion of the alternative market premium, net of reinsurance, to certain SPCs of our wholly owned
Cayman Islands reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell
Reinsurance segment (see further discussion in the Ceded Premiums Written section that follows). The portion not ceded
to the SPCs is retained within our Specialty P&C segment. Total gross premiums written by component in our alternative
market captive cell program were as follows:
Year Ended December 31
($ in millions)
2019
2018
Physicians
Healthcare facilities
Total
$
$
1.4
6.4
7.8
$
$
1.4
4.4
5.8
$
$
Change
—
2.0
2.0
—%
45.5%
34.5%
The increase in our alternative market healthcare facilities premium during 2019 was primarily due to new business
written, including the addition of one large policy totaling $1.4 million. The remaining increase was attributable to
multiple short-term policies written throughout 2018 that renewed on January 1, 2019 with twelve month terms.
(9) This component of gross premiums written includes all other product lines within our Specialty P&C segment. The
increase during 2019 was due to a $1.5 million specialty contractual liability policy.
We are committed to a rate structure that will allow us to fulfill our obligations to our insureds, while generating
competitive long-term 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.
76
The change in renewal pricing for our Specialty P&C segment, including by major component, was as follows:
Specialty P&C segment (1)
Physicians (1)(2)
Healthcare facilities (1)(2)
Other healthcare providers (1)
Legal professionals (2)
Medical technology liability (2)
Year Ended
December 31
2019
6%
6%
14%
5%
2%
2%
(1) Excludes certain policies written on an excess and surplus lines basis as the terms and
conditions of these policies are not consistent between periods.
(2) See Gross Premiums Written section for further explanation of renewal pricing increase.
New business written by major 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
2019
2018
$
25.1
$
9.2
1.5
2.6
4.2
19.8
19.8
2.5
2.8
3.0
$
42.6
$
47.9
For our Specialty P&C segment, we calculate retention as annualized renewed premium divided by all annualized
premium subject to renewal. Retention is 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 for our Specialty P&C segment, including by major component, was as follows:
Specialty P&C segment(1)
Physicians(1)(2)
Healthcare facilities(1)(2)
Other healthcare providers(1)
Legal professionals
Year Ended December 31
2019
2018
86%
88%
62%
88%
88%
89%
90%
87%
87%
86%
Medical technology liability
87%
(1) Excludes certain policies written on an excess and surplus lines basis as the terms and
88%
conditions of these policies are not consistent between periods.
(2) See Gross Premiums Written section for further explanation of retention decline in 2019.
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 4% - 9% 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 $1 million. We pay our reinsurers a ceding premium in exchange for their
accepting the risk, and in certain of our excess of loss arrangements, the ultimate amount of which is determined by the loss
experience of the business ceded, subject to certain minimum and maximum amounts.
77
Ceded premiums written were as follows:
($ 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
2019
35,014
$
—
33,976
6,860
3,266
Year Ended December 31
2018
Change
$
35,591
$
2,105
31,358
5,159
3,310
(577)
(2,105)
2,618
1,701
(44)
(1.6%)
nm
8.3%
33.0%
(1.3%)
2,834
81,950
$
5,525
83,048
$
(2,691)
(1,098)
$
(48.7%)
(1.3%)
(1) We generally reinsure risks under our excess of loss reinsurance arrangements pursuant to which the reinsurers agree
to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the maximum
individual limits offered. Premium due to reinsurers also fluctuates with the volume of written premium subject to
cession under the arrangement. In certain 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. Due to increases in loss experience of business reinsured under those loss sensitive agreements and
resulting increases in premium due to those reinsurers, we have reached the maximum level of premium due under
those arrangements which is driving the decrease in ceded premiums written in 2019 as compared to 2018.
(2) Prior to January 1, 2018, our Specialty P&C segment ceded premiums to Syndicate 1729 under a quota share
reinsurance agreement. We record our participation in Syndicate 1729 in our Lloyd's Syndicates segment on a quarter
lag, except when information is material to the current period. We also recorded the cession to Syndicate 1729 from
our Specialty P&C segment on the same quarter lag 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 2019 is due to the non-renewal of the quota share
reinsurance 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 due to the previously mentioned quarter lag. See the Segment
Operating Results - Lloyd's Syndicates section for further discussion on the quota share agreement.
(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 2019 was primarily
driven by growth in our CAPAssurance program, partially offset by a decrease in exposure related to one of our
Ascension Health 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 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 SPCs from our
Specialty P&C segment. The increase in premiums ceded to SPCs during 2019 was primarily due to new business
written and the renewal of multiple short-term policies written throughout 2018 that renewed on January 1, 2019 with
twelve month terms (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. As part of the review of our reserves during 2019 and 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; however, this increase was lower in 2019 as compared to 2018 due to reaching the maximum level of
premium due under certain prior year excess of loss arrangements. Changes to estimates of premiums ceded related to
prior accident years are fully earned in the period the changes in estimates occur.
78
Ceded Premiums Ratio
As shown in the table below, our ceded premiums ratio was affected in both 2019 and 2018 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
2019
2018
Change
14.2%
14.4%
(0.2) pts
0.5%
13.7%
1.0%
13.4%
(0.5) pts
0.3 pts
The slight increase in the current accident year ceded premiums ratio for the year ended December 31, 2019 was primarily
due to the effect of the 2018 loss portfolio transfer (increase in gross premiums written with no premium ceded) which
decreased the 2018 current accident year ceded premiums ratio by approximately 0.7 percentage points. Excluding the impact
of the 2018 loss portfolio transfer, the current accident year ceded premiums ratio decreased by approximately 0.4 percentage
points in 2019 as compared to 2018 driven by the effect of the non-renewal of the quota share reinsurance agreement with
Syndicate 1729 and a decrease in premium ceded under our excess of loss reinsurance arrangements, partially offset by an
increase in premium ceded to the SPCs in our Segregated Portfolio Cell Reinsurance segment.
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
2019
$ 580,796
2018
$ 580,022
Less: Ceded premiums earned
81,738
88,235
Net premiums earned
$ 499,058
$ 491,787
Change
$
$
774
(6,497)
7,271
0.1%
(7.4%)
1.5%
Gross premiums earned during 2019 and 2018 included the effects of two different loss portfolio transfers which resulted
in $2.7 million and $26.6 million, respectively, of one-time premium written and fully earned in the respective periods (see
discussion under the heading "Gross Premiums Written"). After removing the impacts of the loss portfolio transfers from each
period, gross premiums earned increased $24.7 million due to by the pro rata effect of an increase in the volume of written
premium during the preceding twelve months, predominantly in our physicians and healthcare facilities lines of business driven
by an increase in renewal pricing.
The decrease in ceded premiums earned during 2019 as compared to 2018 reflected the effect of adjustments made during
2019 and 2018 to ceded premiums owed under reinsurance agreements related to prior accident year losses. After removing the
effect of prior accident year ceded premium adjustments from both years, ceded premiums earned decreased $3.8 million in
2019 as compared to 2018. The remaining decrease was driven by the non-renewal of the quota share reinsurance agreement
with Syndicate 1729, partially offset by the pro rata effect of an increase in premiums ceded under our shared risk arrangements
during the preceding twelve months, predominantly in our CAPAssurance program.
79
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.
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 ratios were affected by revisions to our
estimate of premiums owed to reinsurers related to coverages provided in prior accident years. The net loss ratios for our
Specialty P&C segment 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 estimated ratio increase (decrease) attributable to:
Ceded premium adjustments, prior accident years (2)
Net Loss Ratios (1)
Year Ended December 31
2018
2019
106.7% 78.2%
1.2% (15.6%)
105.5% 93.8 %
Change
28.5 pts
16.8 pts
11.7 pts
0.6%
1.0%
(0.4) pts
Current accident year net loss ratio, excluding the effect of prior
year ceded premium (3)
104.9% 92.8 %
12.1 pts
(1) Net losses, as specified, divided by net premiums earned.
(2) During 2019 and 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). 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 (as shown in the
table above), increased 12.1 percentage points as compared to 2018. The change in the current accident year net loss
ratio was primarily attributable to the following:
(In percentage points)
Estimated ratio increase attributable to:
Change in actuarial adjustments related to the current
accident year reserve
Change in DDR reserve adjustment
PDR
All other, net
Increase in the current accident year net loss ratio,
excluding the effect of prior year ceded premium
Increase
2019 versus 2018
6.0 pts
2.9 pts
1.9 pts
1.3 pts
12.1 pts
We update and review the data underlying the estimation of our current accident year reserve each reporting period and
make adjustments to current accident year net loss ratios that we believe best reflect emerging data. Both our internal
and consulting actuaries perform an in-depth review of our current accident year reserve on at least a semi-annual
basis. As a result of these analyses in both 2019 and 2018, we increased our current accident year net loss ratio;
however, the adjustment was greater in 2019 as compared to 2018 which accounted for 6.0 percentage points of the
increase in the current accident year net loss ratio. This increase in 2019 was driven by increased reserve estimates for
a large national healthcare account and, to a lesser extent, in our broader HCPL excess and surplus lines of business.
80
Our broader HCPL excess and surplus lines of business include custom physicians, healthcare facilities, correctional
healthcare and long-term care policies. Also as a result of our annual actuarial analysis, we increased our reserves
related to DDR coverage endorsements in 2019 as compared to a decrease in 2018 which accounted for 2.9 percentage
points of the increase in the current accident year net loss ratio. Furthermore, as part of our quarterly evaluation of the
recoverability of DPAC, we recognized a PDR of $9.2 million which accounted for 1.9 percentage points of the
increase in the current accident year net loss ratio. The PDR represents an estimated premium deficiency associated
with the unearned premium of the aforementioned large national healthcare account which is reflected as a component
of our current accident year net losses; no such reserves were established in 2018. The remaining increase in our
current accident year net loss ratio of 1.3 percentage points was primarily due to changes in the mix of business.
Current accident year loss ratios for our core physicians, podiatric, chiropractic, legal professional liability and
medical technology liability businesses were relatively unchanged as compared to 2018.
As a result of our re-evaluation of previously established reserves, we recognized net unfavorable prior year reserve
development of $5.7 million for the year ended December 31, 2019 as compared to net favorable prior year reserve
development of $77.0 million for the year ended December 31, 2018. Development recognized during 2019 principally related
to accident years 2016 through 2018. Development recognized during 2018 principally related to accident years 2011 through
2014. Net unfavorable prior year reserve development in 2019 included $51.5 million of unfavorable prior year reserve
development related to our reserves for the previously mentioned large national healthcare account that has experienced losses
far exceeding the assumptions we made when underwriting the account, beginning in 2016. Excluding the unfavorable
development related to this account, the Specialty P&C segment recognized favorable prior year reserve development totaling
$45.8 million in 2019 which included favorable loss development in our medical technology liability line of business of $12.8
million. Net favorable loss development in 2018 of $77.0 million included $13.3 million and $10.9 million attributable to our
medical technology liability and legal professional liability lines of business, respectively. While the majority of our reserves
continue to develop favorably, the favorable development we recognized, excluding the large national healthcare account, was
lower as compared to 2018 due to the observed increase in claim severity in the broader HCPL industry.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting
Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our
reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are
reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions
can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2019
and 2018.
Underwriting, Policy Acquisition and Operating Expenses
Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31,
2019 and 2018 were comprised as follows:
($ in thousands)
DPAC amortization
Management fees
Other underwriting and operating expenses
Total
$
2019
56,604
6,742
56,964
Year Ended December 31
2018
Change
$
52,253
6,968
53,198
$ 4,351
(226)
3,766
$ 120,310
$ 112,419
$ 7,891
8.3%
(3.2%)
7.1%
7.0%
DPAC amortization increased during the year ended December 31, 2019 as compared to 2018 driven by an increase in
earned premium, excluding the effects of the premium earned from the loss portfolio transfers in 2019 and 2018 as there were
no deferred acquisition costs associated with those transactions (see discussion under the heading "Gross Premiums Written").
In addition, the increase in DPAC amortization also reflected a decrease in ceding commission income related to the reduction
in premiums ceded to Syndicate 1729, partially offset by an increase in ceding commission income from certain of our shared
risk arrangements.
Management fees are charged pursuant to a management agreement by the Corporate segment to the operating
subsidiaries within our Specialty P&C segment for services provided based on the extent to which services are provided to the
subsidiary and the amount of premium written by the subsidiary. While the terms of the management agreement were consistent
between 2019 and 2018, fluctuations in the amount of premium written by each subsidiary can result in corresponding
variations in the management fee charged to each subsidiary during a particular period.
81
Other underwriting and operating expenses increased during the year ended December 31, 2019 as compared to 2018
primarily driven by $4.9 million of fees incurred in 2019 as compared to $1.0 million in 2018 associated with a data analytics
services agreement entered into during the fourth quarter of 2018, partially offset by a decrease in compensation related costs
primarily due to lower bonuses. See Note 9 of the Notes to Consolidated Financial Statements for further information on the
data analytics services agreement.
Underwriting Expense Ratio (the Expense Ratio)
Our expense ratio for the Specialty P&C segment for the year ended December 31, 2019 as compared to 2018 was as
follows:
Underwriting expense ratio
Year Ended December 31
2018
2019
24.1% 22.9%
Change
1.2 pts
Excluding the impacts of the loss portfolio transfers entered into during 2019 and 2018 (net premiums earned with
minimal associated operating expenses), our underwriting expense ratio was relatively unchanged for the year ended
December 31, 2019 as compared to 2018 as the increase in earned premium and the decrease in compensation related costs
outpaced the increase in DPAC amortization and offset the effect of the fees incurred related to the data analytics services
agreement, as previously discussed.
82
Segment Operating Results - Workers' Compensation Insurance
Our Workers' Compensation Insurance segment includes workers' compensation products provided to employers generally
with 1,000 or fewer employees, as discussed in Note 17 of the Notes to Consolidated Financial Statements. 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 program
premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent,
an unaffiliated captive insurer. 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:
($ 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
2019
$ 182,233
Year Ended December 31
2018
Change
$ 195,350
$ (13,117)
(6.7%)
$ 189,240
$ 186,079
$
2,399
(121,649)
(57,520)
12,470
2,412
(118,483)
(55,693)
14,315
$
$
$
3,161
(13)
(3,166)
(1,827)
(1,845)
1.7%
(0.5%)
2.7%
3.3%
(12.9%)
Net loss ratio
Underwriting expense ratio
64.3%
30.4%
63.7%
29.9%
0.6 pts
0.5 pts
Premiums Written
Our workers’ compensation premium volume is driven by five primary factors: (1) the amount of new business written,
(2) retention of our existing book of business, (3) premium rates charged on our renewal book of business, (4) changes in
payroll exposure and (5) audit premium.
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
2019
278,442
96,209
182,233
$
$
2018
293,230
97,880
195,350
$
$
Change
$
$
(14,788)
(1,671)
(13,117)
(5.0%)
(1.7%)
(6.7%)
Gross Premiums Written
Gross premiums written by product were as follows:
($ in thousands)
2019
2018
Change
Year Ended December 31
Traditional business:
Guaranteed cost
Policyholder dividend
Deductible
Retrospective
Other
$
158,246
$
163,138
20,446
21,203
5,857
2,985
8,660
8,143
6,911
9,413
Alternative market business
82,248
84,422
Total
$
278,442
$
293,230
$
(4,892)
(757)
(2,286)
(3,926)
(753)
(2,174)
$ (14,788)
(3.0%)
(3.6%)
(28.1%)
(56.8%)
(8.0%)
(2.6%)
(5.0%)
Gross premiums written in our traditional business decreased during the year ended December 31, 2019 as compared to
2018, which reflected our response to underpricing that is occurring in a very competitive market. New business written,
renewal pricing and the retention rate all declined during 2019. The decrease in deductible premiums written primarily reflects
83
the loss of three accounts. The decrease in retrospective policy premiums written primarily reflects the loss of two accounts and
the impact of retrospective premium adjustments which are based on the loss experience of the underlying policies.
Retrospective premium adjustments in 2019 decreased premiums written by $2.1 million as compared to adjustments in 2018
that increased premiums written by $0.8 million. Other premiums written primarily reflect our participation in residual market
pools in the states in which we operate; premiums are based on information provided to us by the residual market.
New business opportunities, renewal pricing and retention continue to be a challenge as a result of intense competition,
especially from multi-line carriers that are willing to underprice their workers' compensation products to offset other coverages.
This has resulted in fewer new business opportunities, which is reflected in a 20% decline in submissions during 2019. The
decrease in new business in 2019 as compared to 2018 also reflects the acquisition of the Great Falls renewal book of business
in September 2017, which contributed $11.7 million of new business for the year ended December 31, 2018. Excluding the
Great Falls acquisition, submissions declined 12% during 2019. Renewal pricing decreases reflect the competitive market, as
well as the impact of state loss cost decreases in the majority of the states in which we write business.
Gross premiums written in our alternative market business decreased for the year ended December 31, 2019 as compared
to 2018. New business and renewal pricing trends in our alternative market business for 2019 were relatively consistent with
the trends in our traditional business. We retained all 22 of the available workers' compensation alternative market programs up
for renewal for the year ended December 31, 2019, including 6 programs available for renewal during the fourth quarter of
2019. Additionally, we wrote one new workers' compensation alternative market program in the third quarter of 2019.
New business, audit premium, retention and renewal price changes for both the traditional business and the alternative
market business are shown in the table below:
($ in millions)
$
New business
Audit premium (including EBUB) $
Retention (1)
Change in renewal pricing (2)
2019
Alternative
Market
Business
3.8
$
Traditional
Business
27.0
3.7
$
2.0
79%
(4%)
91%
(5%)
Year Ended December 31
2018
Alternative
Market
Business
Segment
Results
Traditional
Business
$
$
43.2
4.3
$
$
8.3
1.6
$
$
51.5
5.9
Segment
Results
30.8
5.7
$
$
83%
(4%)
84%
(1%)
91%
—%
86%
(1%)
(1) We calculate our workers' compensation retention as annualized expiring renewed premium divided by all annualized
expiring premium subject to renewal. Our retention 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.
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
2019
$ 79,799
13,633
2,449
Year Ended December 31
2018
Change
$ 79,927
$
13,515
4,495
(128)
118
(2,046)
(0.2%)
0.9%
(45.5%)
328
$ 96,209
(57)
$ 97,880
385
$ (1,671)
(675.4%)
(1.7%)
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.
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 treaty. Effective May 1, 2019, our primary
reinsurance layer was renewed with an AAD equal to the greater of $3.9 million or 2.1% of subject premium, in excess of the
$0.5 million retention per loss occurrence, and the elimination of the return premium component of the contract. The addition of
the AAD was partially offset by a reduction in the reinsurance rates under our renewed treaty. Per our reinsurance agreements,
we cede premiums related to our traditional business on an earned premium basis. The increase in premiums ceded to external
84
reinsurers during the year ended December 31, 2019 primarily reflected an increase in earned premium, partially offset by the
impact of lower reinsurance rates for the treaty year effective May 1, 2019.
The decrease in premiums ceded to unaffiliated captive insurers during the year ended December 31, 2019 reflected the
impact of a novation of an unaffiliated captive program into an SPC at Inova Re during the fourth quarter of 2018. The
premium ceded to this program is now reflected in premiums ceded to SPCs in the table above. For the year ended December
31, 2018, premiums related to this program that were ceded to the unaffiliated captive totaled $1.8 million. For the year ended
December 31, 2019, premiums ceded to unaffiliated captive insurers in the table above reflected business ceded to one
unaffiliated captive program.
Changes in the return premium estimate reflected the loss experience under the reinsurance treaties during 2019 and 2018.
The increase in the return premium estimate for the year ended December 31, 2019 reflected prior year unfavorable loss
development on reinsured claims.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Ceded premiums ratio, as reported
Less the effect of:
Premiums ceded to SPCs (100%)
Retrospective premium adjustments
Premiums ceded to unaffiliated captive insurers (100%)
Return premium estimated under external reinsurance
Assumed premiums earned (not ceded to external reinsurers)
Ceded premiums ratio (related to external reinsurance), less
the effects of above
Year Ended December 31
2019
34.2%
2018
34.2%
Change
— pts
26.2%
0.1%
1.1%
0.2%
(0.3%)
25.1%
—%
2.4%
—%
(0.3%)
1.1 pts
0.1 pts
(1.3) pts
0.2 pts
— pts
6.9%
7.0%
(0.1) pts
The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede
premiums related to our traditional business to external reinsurers on an earned premium basis. For the year ended
December 31, 2019, the ceded premiums ratio, excluding the effects in the table above, decreased slightly as compared to 2018
which primarily reflected the impact of lower reinsurance rates for the treaty year effective May 1, 2019.
Net Premiums Earned
Net premiums earned were as follows:
($ in thousands)
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
Year Ended December 31
2019
287,409
98,169
189,240
$
$
2018
282,974
96,895
186,079
$
$
$
$
Change
4,435
1,274
3,161
1.6%
1.3%
1.7%
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 to any 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 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 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, 2019 or 2018. The increase in net premiums earned primarily
reflected the pro rata effect of higher net premiums written during the preceding twelve months, partially offset by the
retrospective policy premium adjustments, as previously discussed.
85
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 for the current accident year 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
2019
64.3%
(4.1%)
68.4%
2018
Change
63.7%
(4.3%)
68.0%
0.6 pts
0.2 pts
0.4 pts
The 2019 current accident year net loss ratio reflects the impact of the AAD (see previous discussion under the heading
"Ceded Premiums Written") and renewal rate decreases, largely offset by overall favorable trends in claim closing patterns
during 2019.
Calendar year incurred losses (excluding IBNR) ceded to our external reinsurers decreased $10.1 million for the year
ended December 31, 2019 as compared to 2018. Current accident year ceded incurred losses decreased $5.5 million as
compared to 2018. The decrease in losses ceded to our external reinsurers primarily reflects the impact of the AAD, which
reduced ceded losses by $3.9 million, and a reduction in reported reinsured claims during 2019.
We recognized net favorable development related to our previously established reserves of $7.8 million for the year ended
December 31, 2019 as compared to $8.0 million for 2018. The net favorable prior year development for the years ended
December 31, 2019 and 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, 2019 and 2018, the net favorable prior year development included
$1.6 million related to the amortization of the purchase accounting fair value adjustment. The fair value adjustment has been
fully amortized as of December 31, 2019.
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses includes the amortization of commissions, premium taxes and
underwriting salaries, which are capitalized and deferred over the related workers’ compensation policy period, net of ceding
commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our contract
acquisition efforts. These expenses also include a management fee charged by our Corporate segment, which represents
intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily related to the
acquisition of Eastern by ProAssurance. The management fee is based on the extent to which services are provided to the
subsidiary and the amount of premium written by the subsidiary.
Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised
as follows:
($ in thousands)
2019
2018
Change
Year Ended December 31
DPAC amortization
Management fees
Other underwriting and operating expenses
SPC ceding commission offset
2,088
39,073
(17,979)
Total
$
57,520
$
2,193
37,407
(17,259)
55,693
$
986
(105)
1,666
(720)
1,827
3.0%
(4.8%)
4.5%
4.2%
3.3%
$
34,338
$
33,352
$
The increase in DPAC amortization for the year ended December 31, 2019 as compared to 2018 primarily reflected the
increase in net premiums earned. The increase in other underwriting and operating expenses for the year ended December 31,
2019 as compared to 2018 reflected an increase in compensation and benefit related costs, technology costs, including an
increase in the allocation of technology costs charged by our Corporate segment, professional fees and bad debt expense.
86
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, an unaffiliated captive insurer. The ceding commission consists of an amount for
fronting fees, cell rental fees, commissions, premium taxes 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.
Cell rental fees are recorded as a component of other income and claims administration fees are recorded as ceded ULAE. The
increase in SPC ceding commissions earned in 2019 as compared to 2018 primarily reflected the increase in alternative market
earned premium.
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
Retrospective premium adjustment
Impact of audit premium
Underwriting expense ratio, less listed effects
Year Ended December 31
2019
30.4%
2018
29.9%
Change
0.5 pts
2.8%
0.2%
(0.4%)
27.8%
2.9%
(0.1%)
(0.4%)
27.5%
(0.1) pts
0.3 pts
— pts
0.3 pts
The increase in the expense ratio for the year ended December 31, 2019, exclusive of the items noted in the table,
primarily reflected the increase in other underwriting and operating expenses noted above.
87
Segment Operating Results - Segregated Portfolio Cell Reinsurance
The Segregated Portfolio Cell Reinsurance segment reflects the operating results (underwriting profit or loss, plus
investment results, net of U.S. federal income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations,
as discussed in Note 17 of the Notes to Consolidated Financial Statements. 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 attributable 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 ranges from a low of 20% to a high of 85%. SPC operating results
attributable to external cell participants are reflected as an 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 attributable to external cell participants are
reflected in the SPC dividend expense. As of December 31, 2019, there were 27 (23 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. As of December 31, 2019, there were two SPCs that assumed both
workers' compensation insurance and healthcare professional liability insurance and one SPC that assumed only healthcare
professional liability insurance. In addition, an SPC at Eastern Re assumed an errors and omissions liability policy from a
captive insurer unaffiliated with ProAssurance during 2019.
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)
2019
2018
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(1)
SPC net operating results
SPC dividend (expense) income(2)
Segment operating results(3)
Net loss ratio
Underwriting expense ratio(1)
$
$
77,639 $
75,547 $
2,092
2.8%
78,563 $
1,578
4,020
559
(52,412)
(24,260)
8,048
(4,579)
73,940 $
1,566
(3,149)
211
(38,726)
(22,426)
11,416
(9,122)
4,623
12
6.3%
0.8%
7,169
(227.7%)
348
(13,686)
(1,834)
(3,368)
4,543
164.9%
35.3%
8.2%
(29.5%)
(49.8%)
$
3,469 $
2,294 $
1,175
51.2%
66.7%
30.9%
52.4%
30.3%
14.3 pts
0.6 pts
(1) Underwriting, policy acquisition and operating expenses in both 2019 and 2018 included a provision for U.S. federal income taxes of $1.1 million
and $0.4 million, respectively, for SPCs at Inova Re that have elected to be taxed as U.S. taxpayers. The portion of U.S. federal income taxes
attributable to external cell participants is reflected in SPC dividend (expense) income. See the section that follows under the heading "Underwriting,
Policy Acquisition and Operating Expenses" for the impact the provision for U.S. federal income taxes had on the underwriting expense ratio in
2019 and 2018 as these U.S. federal income taxes do not represent underwriting expenses of the SPCs.
(2) Represents the net operating (profit) loss attributable to external cell participants.
(3) Represents our share of the net operating profit (loss) of the SPCs in which we participate.
88
Premiums Written
The majority of premiums in our Segregated Portfolio Cell Reinsurance segment are assumed from either our Workers'
Compensation Insurance or Specialty P&C segments. Premium volume is driven by five primary factors: (1) the amount of new
business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and,
for workers' compensation business, (4) changes in payroll exposure and (5) audit premium.
Gross, ceded and net premiums written were as follows:
($ in thousands)
Gross premiums written
Less: Ceded premiums written
Net premiums written
Year Ended December 31
2019
$ 87,140
9,501
$ 77,639
2018
$ 85,086
9,539
$ 75,547
Change
$
$
2,054
(38)
2,092
2.4%
(0.4%)
2.8%
Gross Premiums Written
Gross premiums written reflected reinsurance premiums assumed by component as follows:
($ in thousands)
Workers' compensation
Healthcare professional liability
Other
2019
$ 79,799
6,860
481
Year Ended December 31
2018
Change
$ 79,927
$
5,159
—
(128)
1,701
481
Gross Premiums Written
$ 87,140
$ 85,086
$
2,054
(0.2%)
33.0%
nm
2.4%
Gross premiums written for the years ended December 31, 2019 and 2018 were primarily comprised of workers'
compensation coverages assumed from our Workers' Compensation Insurance segment. Workers' compensation gross premiums
written decreased during 2019, primarily reflecting the competitive workers' compensation market. The increase in healthcare
professional liability gross premiums written during 2019 was driven primarily by the addition of one large policy and the
renewal of certain policies in 2019 that were written on a short-term basis in 2018. We retained 100% of the available
alternative market programs up for renewal during 2019, including 22 workers' compensation programs and 3 healthcare
professional liability programs. Additionally, we added one new alternative market program at Inova Re during the third quarter
of 2019.
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
$
$
$
$
2019
3.8
2.0
91%
(5%)
2018
8.3
1.6
91%
—%
(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.
89
Ceded Premiums Written
Ceded premiums written were as follows:
($ in thousands)
Ceded premiums written
2019
9,501
$
2018
$
9,539
$
Change
(38)
(0.4%)
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
occurrence for the workers' compensation business 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 $2.1 million on a
program year basis. Per the SPC external reinsurance agreements, premiums are ceded on a written premium basis and changes
in ceded premiums written during 2019 primarily reflected changes in gross premiums written as compared to 2018. External
reinsurance rates vary based on the alternative market program.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Ceded premiums ratio
11.9%
11.9%
— pts
Year Ended December 31
2019
2018
Change
The above table reflects ceded premiums as a percent of gross premiums written for the workers' compensation business
only; healthcare professional liability business is assumed net of reinsurance, as discussed above. The ceded premiums ratio
reflects the weighted average reinsurance rates of all SPC programs. The ceded premiums ratio remained unchanged for the
year ended December 31, 2019 as compared to 2018.
Net Premiums Earned
Gross, ceded and net premiums earned were as follows:
($ in thousands)
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
Year Ended December 31
2019
88,304
9,741
78,563
$
$
2018
83,264
9,324
73,940
$
$
Change
$
$
5,040
417
4,623
6.1%
4.5%
6.3%
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, 2019 and 2018 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 year ended December 31, 2019 primarily reflected realized gains from the sale of equity securities. Net
realized investment losses for the year ended December 31, 2018 primarily reflected a decrease in the fair value of the equity
securities portfolio.
90
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. 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 loss results can
create volatility in the current accident year net loss ratio to fluctuate significantly from period to period.
For the year ended December 31, 2019, our Segregated Portfolio Cell Reinsurance segment's net loss ratio was affected by
a $10 million reserve that an SPC at Eastern Re established during the second quarter of 2019. This SPC previously assumed an
errors and omissions policy that provides coverage for losses up to a lifetime maximum of $10 million from a captive insurer
unaffiliated with ProAssurance. During the second quarter of 2019, a claim was filed under this policy that met the lifetime
maximum limit and, accordingly, a $10 million reserve was recorded. We do not participate in the SPC that assumed this policy;
therefore, these losses are the obligation of the external cell participants and are reflected as an offset in the SPC dividend
expense (income) and have no effect on our Segregated Portfolio Cell Reinsurance segment net operating results for the year
ended December 31, 2019. Given the significance of this one-time event, we have removed the impact of the policy from each
of the ratios below (as shown in the columns labeled "Adjusted") in order to assist in the comparability between periods.
Calendar year and current accident year net loss ratios for the years ended December 31, 2019 and 2018 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
2019
E&O reserve
impact
12.3
pts
As reported
66.7%
Year Ended December 31
2018
Change
Adjusted
54.4%
As reported
52.4%
As reported
Adjusted
14.3 pts
2.0 pts
(12.9%)
79.6%
— pts
pts
12.3
(12.9%)
67.3%
(12.1%)
64.5%
(0.8) pts
15.1 pts
(0.8) pts
2.8 pts
Excluding the impact of the errors and omissions liability policy, as shown above, the current accident year net loss ratio
increased in 2019 as compared to 2018 primarily due to an increase in severity-related claims activity.
Calendar year incurred losses ceded to our external reinsurers increased $11.1 million for the year ended December 31,
2019 as compared to 2018. Current accident year ceded incurred losses increased $9.1 million for the year ended December 31,
2019 as compared to 2018. The increase in current accident year ceded incurred losses primarily reflected the impact of four
claims totaling $11.2 million, of which $8.3 million related to two claims, incurred in 2019.
We recognized net favorable prior year development of $10.1 million and $9.0 million for the years ended December 31,
2019 and 2018, respectively. The net favorable prior year reserve development for the year ended December 31, 2019 primarily
reflected overall favorable trends in claim closing patterns, primarily in the 2015 through 2018 accident years. The net
favorable prior year reserve development for the year ended December 31, 2018 also primarily reflected overall favorable
trends in claim closing patterns, primarily in the 2015 through 2017 accident years.
Underwriting, Policy Acquisition and Operating Expenses
Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were
comprised as follows:
($ in thousands)
DPAC amortization
Other underwriting and operating expenses
Total
Year Ended December 31
2019
21,717
2,543
24,260
$
$
$
$
2018
21,039
$
Change
678
3.2%
1,387
1,156
83.3%
22,426
$ 1,834
8.2%
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.
Other underwriting and operating expenses primarily include bank fees, professional fees, bad debt expense and a
provision for federal income taxes paid by the SPCs. The increase in other underwriting and operating expense for the year
91
ended December 31, 2019 as compared to 2018 primarily reflected an increase in the provision for federal income taxes and
fees related to letters of credit posted as program collateral. The provision for federal income taxes totaled $1.1 million and $0.4
million in 2019 and 2018, respectively.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Underwriting expense ratio, as reported
Less:
Year Ended December 31
2019
30.9%
2018
30.3%
Change
0.6 pts
Impact of audit premium
(0.7%)
(0.7%)
— pts
Impact of provision for federal income taxes
related to SPCs at Inova Re
Underwriting expense ratio, less listed effects
1.4%
30.2%
0.5%
30.5%
0.9 pts
(0.3) pts
Underwriting, policy acquisition and operating expenses in both 2019 and 2018 included a provision for U.S. federal
income taxes of $1.1 million and $0.4 million, respectively, for SPCs at Inova Re that have elected to be taxed as U.S. tax
payers. The increase in the federal income tax provision for the year ended December 31, 2019 as compared to 2018 reflects an
increase in taxable income for the Inova Re SPCs. This provision for federal income taxes is included in the total SPC net
operating results and the portion of federal income taxes attributable to external cell participants is reflected in the SPC
dividend (expense) income. We have removed the impact of the provision for U.S. federal income taxes from the expense ratio
as these expenses do not represent underwriting expenses of the SPCs.
Excluding the effects of audit premium and the provision for U.S. federal income taxes, the underwriting expense ratio
primarily reflected the weighted average ceding commission percentage of all SPC programs.
92
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. In addition to our participation in Syndicate operating results, we have investments in and other obligations to our
Lloyd's Syndicates consisting of a Syndicate Credit Agreement and FAL requirements. For the 2019 underwriting year, our FAL
was comprised of investment securities and cash and cash equivalents deposited with Lloyd's which at December 31, 2019 had
a fair value of approximately $137.1 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements.
We normally report results from our involvement in Lloyd's Syndicates on a quarter lag, 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 provide capital to Syndicate 1729, which covers a range of property and casualty insurance
and reinsurance lines in both the U.S. and international markets. The remaining capital for Syndicate 1729 is 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% which, due to the quarter lag, was not
reflected in our Lloyd's Syndicates segment results until the second quarter of 2019. Syndicate 1729 had a maximum
underwriting capacity of £128 million (approximately $169.7 million at December 31, 2019) for the 2019 underwriting year, of
which £78 million ($103 million based on December 31, 2019 exchange rates) was our allocated underwriting capacity. To
reduce our exposure and the associated earnings volatility, we decreased our participation in the operating results of Syndicate
1729 for the 2020 underwriting year from 61% to 29% which, due to the quarter lag, will not be reflected in our Lloyd's
Syndicates segment results until the second quarter of 2020. Syndicate 1729's maximum underwriting capacity for the 2020
underwriting year is £135 million (approximately $179 million at December 31, 2019), of which £39 million (approximately
$51 million at December 31, 2019) is our allocated underwriting capacity.
Lloyd's Syndicate 6131. We are the sole (100%) capital provider to an SPA, Syndicate 6131, which focuses on
contingency and specialty property business in both the U.S. and international markets. As an SPA, Syndicate 6131 is only
allowed to underwrite one quota share reinsurance contract with Syndicate 1729. Due to the quarter lag, our participation in
Syndicate 6131 was not reflected in our Lloyd's Syndicates segment results until the second quarter of 2018, as Syndicate 6131
began writing business effective January 1, 2018. For the 2019 underwriting year Syndicate 6131 had a maximum underwriting
capacity of £12 million ($16 million based on December 31, 2019 exchange rates). For the 2020 underwriting year, Syndicate
6131 has a maximum underwriting capacity of £12 million (approximately $16 million at December 31, 2019).
In addition to the results of our participation in Lloyd's Syndicates, as discussed above, our Lloyd's Syndicates segment
also includes 100% of the operating results of our wholly owned subsidiaries that support our operations at Lloyd's. For the
years ended December 31, 2019 and 2018, the results of our Lloyd's Syndicates segment were as follows:
($ 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
$
$
$
2019
$ 110,905
$
$
(23,802)
87,103
80,671
4,551
768
(573)
(47,369)
(34,711)
—
$
3,337
$
2018
88,746
(18,877)
69,869
67,047
$
$
$
3,358
(460)
322
(51,570)
(31,686)
317
(12,672) $
Change
22,159
(4,925)
17,234
13,624
1,193
1,228
(895)
4,201
(3,025)
(317)
16,009
25.0%
26.1%
24.7%
20.3%
35.5%
267.0%
(278.0%)
(8.1%)
9.5%
(100.0%)
126.3%
58.7%
43.0%
76.9%
47.3%
(18.2) pts
(4.3) pts
93
Property and Natural Catastrophe Losses
As previously mentioned, we normally report results from our involvement in Lloyd's Syndicates on a quarter lag;
however, during the fourth quarter of 2018, we accelerated our reporting of approximately $6.8 million, net of reinsurance and
reinstatement premiums, of storm-related losses in connection with Hurricane Michael, which affected the northwest portion of
Florida during October 2018. These losses would have normally been reported in the first quarter of 2019 due to the
aforementioned quarter delay. However, due to the availability and significance of these estimates, we 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. No such adjustments were made during 2019.
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 2019 consisted of property insurance coverages (42% of total gross premiums written),
casualty coverages (31%), catastrophe reinsurance coverages (16%), specialty property coverages (8%) and property
reinsurance coverages (3%). The increase in gross premiums written during 2019 as compared to 2018 was primarily driven by
volume increases on renewal business and renewal pricing increases, as well as new business written, primarily property
insurance coverages.
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. Premiums assumed
from our Specialty P&C segment were approximately $1.2 million during the year ended December 31, 2019. The 2017 and
2016 calendar year quota share arrangements with our Specialty P&C segment were commuted in December 2018 and 2017,
respectively. Due to the quarter lag, the effects of the 2017 and 2016 commutations were reported in both segments' results
during the first quarters of 2019 and 2018, respectively, and are reflected in the Lloyd's Syndicates segment results for the years
ended December 31, 2019 and 2018, respectively. The commutations did not differ significantly from the 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, 2019 as compared to 2018 primarily due to the overall increase in gross premiums
written.
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.
Gross, ceded and net premiums earned were as follows:
($ in thousands)
Gross premiums earned
Less: Ceded premiums earned
Net premiums earned
2019
101,222
20,551
80,671
$
$
$
$
Year Ended December 31
2018
Change
83,307
16,260
67,047
$
$
17,915
4,291
13,624
21.5%
26.4%
20.3%
The increase in gross premiums earned for the year ended December 31, 2019 as compared to 2018 was driven by the pro
rata effect of higher premiums written during the preceding twelve months, primarily property insurance coverages and, to a
greater extent for 2019, 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
94
over twelve months. During 2019, the increase in gross premiums earned also reflected our participation in Syndicate 6131 at
the beginning of 2018, which was not reflected in our Lloyd's Syndicates Segment results until the second quarter of 2018.
The increase in ceded premiums earned during 2019 was driven by the pro rata effect of an increase in premiums ceded
under reinsurance arrangements during the preceding twelve months due to the increase in gross premiums earned, as
previously discussed.
Gross and net premiums earned included a nominal amount of premium assumed from our Specialty P&C segment during
2019 as compared to approximately $5.0 million of premium assumed during 2018.
Net Losses and Loss Adjustment Expenses
Losses for the year were primarily recorded using the loss assumptions by risk category incorporated into the business
plans submitted to Lloyd's for Syndicate 1729 and Syndicate 6131 with consideration given to loss experience incurred to date.
The assumptions used in each business plan were consistent with loss results reflected in Lloyd's historical data for similar
risks. The loss ratios may 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 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
2019
2018
Change
58.7%
0.5%
58.2%
76.9%
2.9%
74.0%
(18.2) pts
(2.4) pts
(15.8) pts
The decrease in the current accident year net loss ratio for the year ended December 31, 2019 as compared to the year
ended December 31, 2018 was driven by an increase in estimated reinsurance recoveries related to property and catastrophe
related losses as well as the increase in net premiums earned, as previously discussed.
We recognized $0.4 million of unfavorable prior year development for the year ended December 31, 2019 as compared to
$2.0 million of unfavorable prior year development for the year ended December 31, 2018. 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 $3.0 million for the year ended December 31, 2019
as compared to 2018 primarily due to an increase in DPAC amortization driven by an increase in net premiums earned, partially
offset by the effect of higher operational expenses incurred associated with establishing Syndicate 6131 during 2018.
The decrease in the underwriting expense ratio for the year ended December 31, 2019 as compared to 2018 was primarily
due to the increased volume of earned premium as a result of the growth of the Syndicates. In addition, the decrease in the
underwriting expense ratio reflected the effect of higher operational expenses in 2018 associated with the establishment of
Syndicate 6131.
Investments
Net investment income increased during the year ended December 31, 2019 as compared to 2018 due to an increase in
interest earned on our FAL due to a higher average FAL balance in 2019 as compared to 2018. Our FAL primarily includes
investment-grade corporate debt securities. Syndicate 1729's fixed maturities portfolio includes certain debt securities classified
as trading securities. Investment results associated with these fixed maturity trading securities are reported on the same quarter
lag.
Taxes
Operating results of this segment are subject to U.K. income tax law.
95
Segment Operating Results - Corporate
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, as discussed in Note 17 of the Notes to
Consolidated Financial Statements. 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 $129.7
million and $42.3 million for the years ended December 31, 2019 and 2018, respectively, and included the following:
Year Ended December 31
Net investment income
($ in thousands)
Equity in earnings (loss) of unconsolidated subsidiaries
Net realized gains (losses)
Operating expense
Interest expense
Income tax expense (benefit)
Change
2019
$
87,140
$
$ (10,061) $
55,086
$
$
19,146
2018
86,960
8,948
$ (39,879) $
$
18,767
$
$
180
$ (19,009)
94,965
379
16,636
473
$
$ (29,808) $ (17,715) $ (12,093)
16,163
$
$
0.2%
(212.4%)
238.1%
2.0%
2.9%
(68.3%)
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, net of investment fees and expenses.
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
2019
66,862
17,650
6,635
2,017
(6,024)
87,140
$
$
Year Ended December 31
2018
Change
$
64,523
$
21,418
5,351
1,983
(6,315)
86,960
$
$
2,339
(3,768)
1,284
34
291
180
3.6%
(17.6%)
24.0%
1.7%
(4.6%)
0.2%
Fixed Maturities
The increase in income from our fixed maturities during 2019 was primarily due to higher yields from certain asset
classes in our fixed maturity portfolio. In addition, on an overall basis, our average investment in fixed maturity securities was
approximately 2% higher for the year ended December 31, 2019 as compared to 2018.
Average yields for our fixed maturity portfolio were as follows:
Average income yield
Average tax equivalent income yield
Equities
Year Ended December 31
2019
3.4%
3.4%
2018
3.3%
3.4%
Income from our equity portfolio decreased during 2019 as compared to 2018 which reflected a decrease in our allocation
to this asset category as well as a different mix of equities owned.
96
Short-term Investments and Other 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 increased during 2019 primarily attributable to higher
yields as compared to 2018.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries was as follows:
Year Ended December 31
($ in thousands)
All other investments, primarily investment fund LPs/LLCs
Tax credit partnerships
Equity in earnings (loss) of unconsolidated subsidiaries
$
2019
10,842
(20,903)
$ (10,061) $
$
2018
Change
33,270
(24,322)
8,948
$ (22,428)
3,419
$ (19,009)
(67.4%)
(14.1%)
(212.4%)
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, 2019 driven by lower reported earnings from two LP investments which accounted for $20.5
million of the decrease as compared to 2018.
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 the majority of the remaining operating losses are expected to be recognized in 2020. The results from our tax credit
partnership investments for the year ended December 31, 2019 reflected lower partnership operating losses as compared to
2018. Based on operating results received, we increased our estimate of partnership operating losses by $3.0 million in each of
the years ended December 31, 2019 and 2018.
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above,
reduced our tax expenses in 2019 and 2018 as follows:
(In millions)
Tax credits recognized during the period
Tax benefit of tax credit partnership operating losses
Year Ended December 31
2019
2018
$
$
21.9
4.4
$
$
21.0
5.1
Due to our consolidated loss before income taxes recognized for the year ended December 31, 2019, the tax credits
generated in 2019 from our tax credit partnership investments of $18.1 million were deferred and are expected to be utilized in
future periods. Tax credits in the above table recognized during the year ended December 31, 2019 included tax credits of $3.8
million that were carried forward from 2018, which had previously been carried back to the 2017 tax year; however because we
expect to carryback our tax loss for the year ended December 31, 2019 to the 2017 tax year, a portion of those tax credits have
been recaptured. Of the $3.8 million of tax credits recaptured and recognized during the year ended December 31, 2019, $0.2
million was recognized as a current income tax benefit and $3.6 million was recognized as a deferred income tax benefit in
2019. See Note 6 of the Notes to Consolidated Financial Statements for further information.
Tax credits provided by the underlying projects of the historic tax credit partnerships are typically available in the tax year
in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax credit
partnerships are provided over approximately a ten year period. The increase in tax credits recognized in 2019 was primarily
attributable to our historic tax credit partnership investments.
97
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
Pro forma tax-equivalent investment result
Reconciliation of pro forma and GAAP tax-equivalent
investment result:
GAAP net investment result
Taxable equivalent adjustments, calculated using the 21%
federal statutory tax rate
State and municipal bonds
BOLI
Dividends received
Tax credit partnerships*
Year Ended December 31
2019
2018
$
$
$
87,140
(10,061)
77,079
$
$
86,960
8,948
95,908
78,946
$ 125,533
$
77,079
$
95,908
842
536
489
—
1,693
527
772
26,633
Pro forma tax-equivalent investment result
$
78,946
$ 125,533
*Due to our consolidated pre-tax loss in 2019, the tax credits recognized from our tax credit
partnership investments were deferred to be utilized in future periods; therefore, there is no tax-
equivalent adjustment required as tax credits had no impact on our current tax expense in 2019.
98
Net Realized Investment Gains (Losses)
The following table provides detailed information regarding our net realized investment gains (losses).
OTTI losses, total:
Corporate debt
(In thousands)
Portion of OTTI losses recognized in other comprehensive income before taxes:
Year Ended December 31
2019
2018
$
(978) $
(490)
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
227
(751)
3,628
(551)
16,612
1,626
30,801
3,653
68
Net realized investment gains (losses)
$
55,086
—
(490)
5,940
(5,715)
12,030
1,340
(49,398)
(3,849)
263
$ (39,879)
During 2019, we recognized credit-related OTTI in earnings of $0.8 million and non-credit OTTI in OCI of $0.2 million,
both of which related to three corporate bonds in the energy and consumer sectors. We recognized OTTI in earnings of $0.5
million during 2018 related to debt instruments from two issuers in the energy sector.
We recognized $55.1 million of net realized investment gains during 2019, driven by both realized gains from the sale of
equity investments and unrealized holding gains on our equity portfolio due to the improvement in the market since December
31, 2018, which caused our equity securities to increase in value. The most significant sectors that benefited from the
improvement in the market were the financial and energy sectors.
We recognized $39.9 million of net realized investment losses during 2018, primarily driven by unrealized holding losses
on our equity trading portfolio and, to a lesser extent, unrealized losses on convertible securities. The primary driver of these
unrealized holding losses was market volatility throughout 2018, which caused our securities to decline in value. The most
significant sectors impacted by the market volatility were the financial and energy sectors, although all sectors were impacted.
99
Operating Expenses
Corporate segment operating expenses were comprised as follows:
($ in thousands)
Operating expenses
Management fee offset
Segment Total
2019
34,717
(15,571)
19,146
$
$
Year Ended December 31
2018
Change
$
$
34,437
(15,670)
18,767
$
$
280
99
379
0.8%
(0.6%)
2.0%
The increase in operating expenses during 2019 as compared to 2018 was primarily driven by an increase in employee
benefits, primarily medical costs associated with employee health plans, and other one-time compensation related expenses as
well as professional fees, largely offset by a decrease in share-based compensation expenses and, to a lesser extent, technology-
related expenses. The decrease in share-based compensation expenses in 2019 was attributable to a decrease in value of the
projected awards based on the decline of one of the associated performance metrics as well as fewer awards outstanding as
compared to 2018. The decrease in technology expenses was due to an increase in the allocation of technology costs to the
operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments from our Corporate segment.
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 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 2018 and 2019, fluctuations in the amount of premium written by each subsidiary can result in
corresponding variations in the management fee charged to each subsidiary during a particular period.
Interest Expense
Consolidated interest expense for the years ended December 31, 2019 and 2018 was comprised as follows:
Senior Notes due 2023
($ in thousands)
Revolving Credit Agreement (including fees and amortization)
Mortgage Loans (including amortization)*
(Gain)/loss on interest rate cap
Other
Interest expense
Year Ended December 31
2019
$ 13,429
2018
$ 13,429
$
645
1,438
1,124
—
1,388
1,425
(153)
28
$ 16,636
$ 16,117
$
Change
—
(743)
13
—%
(53.5%)
0.9%
1,277
(28)
519
(834.6%)
nm
3.2%
* During 2019, we received nominal cash payments associated with our interest rate cap which were recorded as a reduction to
interest expense associated with our Mortgage Loans.
Consolidated interest expense increased during 2019 as compared to 2018 driven by the change in the fair value of our
interest rate cap. The interest rate cap is designated as an economic hedge of interest rate risk associated with our variable rate
Mortgage Loans. Excluding the impact of the change in fair value of our interest rate cap, consolidated interest expense
decreased during 2019 as compared to 2018 driven by lower interest expense on our Revolving Credit Agreement as we did not
have any outstanding borrowings during the year ended December 31, 2019 compared to weighted average outstanding
borrowings of $41 million for the year ended December 31, 2018. Interest expense on our Revolving Credit Agreement for the
year ended December 31, 2019 primarily reflected unused commitment fees as there were no outstanding borrowings during the
period. See further discussion of our outstanding debt in Note 11 and further discussion of our interest rate cap agreement in
Note 12 of the Notes to Consolidated Financial Statements.
100
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, as those SPCs elected 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)
Corporate segment income tax expense (benefit)
Lloyd's Syndicates segment income tax expense (benefit)
Consolidated income tax expense (benefit)
Year Ended
December 31
2019
2018
$ (29,808) $ (17,715)
(317)
$ (29,808) $ (18,032)
—
Below we list the primary factors affecting our consolidated effective tax rate in 2019 and 2018. The comparability of
each factor's impact on our effective tax rate is affected by the consolidated pre-tax loss recognized in 2019 as compared to the
consolidated pre-tax income recognized in 2018. Factors that have the same directional impact on income tax expense in each
year have an opposite impact on our effective tax rate due to the effective tax rate being calculated based upon on a pre-tax loss
in 2019 versus pre-tax income in 2018. These factors include the following:
Computed "expected" tax expense (benefit) at
statutory rate
Tax-exempt income*
Tax credits
Non-U.S. operating results
Excess tax benefit on share-based compensation
Tax rate differential on loss carryback
Provision-to-return differences
Change in uncertain tax positions
State income taxes
Benefit from amended returns
Other
Total income tax expense (benefit)
Year Ended December 31
2019
2018
Income tax
(benefit) expense Rate Impact
Income tax
(benefit) expense
Rate Impact
$
(6,049)
(1,528)
(21,933)
(1,447)
99
(3,400)
3,595
1,956
(376)
(550)
21.0% $
5.3%
76.1%
5.0%
(0.3%)
11.8%
(12.4%)
(6.8%)
1.3%
1.9%
6,095
(2,505)
(21,059)
2,269
(275)
—
(2,309)
(51)
129
—
(175)
(29,808)
0.6%
103.5% $
(326)
(18,032)
$
21.0%
(8.6%)
(72.6%)
7.8%
(0.9%)
—%
(8.0%)
(0.2%)
0.4%
—%
(1.0%)
(62.1%)
*Includes tax-exempt interest, dividends received deduction and change in cash surrender value of BOLI.
Our effective tax rates for 2019 and 2018, as shown in the table above, resulted in an income tax benefit in both years and
differs from the statutory federal income tax rate of 21% primarily due to the recognition of a tax benefit from credits
transferred to us from our tax credit partnership investments in both 2019 and 2018 and, to a lesser extent, portions of our
income that are exempt from federal income taxes. Our effective tax rate in 2019 was also affected by the tax rate differential
on the carryback of our current year tax loss to the 2017 tax year when the federal statutory tax rate was 35% as compared to
the current tax rate of 21%. Additionally, our effective tax rates in both 2019 and 2018 were impacted by provision-to-return
differences. For 2019, these differences primarily reflected a lower amount of tax credits utilized in 2018 than the previously
estimated tax benefit. For 2018, 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.
101
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe that we are principally exposed to three types of market risk; interest rate risk, credit risk and equity price risk.
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
debt security 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, 2019 and December 31, 2018. 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, 2019
Fair Value:
Fixed maturities, available for sale:
U.S. Treasury obligations
$
117
$
113
$
111
$
108
$
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
18
320
1,425
548
17
308
1,382
537
17
296
1,340
525
17
285
1,300
511
105
16
274
1,261
497
Total fixed maturities, available for sale
$
2,428
$
2,357
$
2,289
$
2,221
$
2,153
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
2.78
0.75
3.91
3.10
2.12
2.95
2.71
0.71
3.84
3.04
2.21
2.92
2.64
0.98
3.82
3.02
2.46
2.96
2.58
3.07
3.89
3.01
2.73
3.04
2.52
3.87
3.93
2.99
2.87
3.07
102
($ 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
$
127
$
124
$
120
$
117
$
36
316
1,300
443
36
305
1,261
432
35
294
1,224
421
34
283
1,187
409
114
33
273
1,153
396
Total fixed maturities, available for sale
$
2,222
$
2,158
$
2,094
$
2,030
$
1,969
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
2.50
4.18
3.73
2.83
3.23
3.04
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, 2019, our fixed maturities portfolio includes fixed maturities classified as trading securities which do
not have a significant amount of exposure to market interest rates or credit spreads.
Our cash and short-term investments at December 31, 2019 are carried at fair value which approximates their cost basis
due to their short-term nature. Our cash and short-term investments lack significant interest rate sensitivity due to their short
duration.
Debt
Our Mortgage Loans are exposed to interest rate risk as they accrue interest at three-month LIBOR plus 1.325%.
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 12 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, 2019, no borrowings were outstanding under our Revolving Credit Agreement.
103
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, 2019, 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 creditworthiness of our securities. The ratings reflect the subjective opinion of the rating agencies as to the
creditworthiness 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 premiums receivable and receivables from reinsurers; however, to-date
we have not experienced any significant amount of credit losses. At December 31, 2019, our premiums receivable was
approximately $250 million and the allowance for credit losses was $1.6 million and estimated credit losses and actual credit
write-offs, net of recoveries, was $0.3 million during the year ended December 31, 2019. At December 31, 2019, our
receivables from reinsurers (with regard to both paid and unpaid losses) was approximately $403 million. We monitor the credit
risk associated with our reinsurers using publicly available financial and rating agency data. As of December 31, 2019, we had
no allowance for credit losses related to our reinsurance receivables as all reinsurance balances were considered collectible and
no reinsurance balances were written off for credit reasons during 2019.
Equity Price Risk
At December 31, 2019, the fair value of our equity investments, excluding our equity investments in bond investment
funds as discussed in the following paragraph, was $170 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 0.92. 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 9.2% to $186 million. Conversely, a 10% decrease in the S&P 500 Index
would imply a decrease of 9.2% in the fair value of these securities to $154 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.
104
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2019 and December 31, 2018
Consolidated Statements of Changes in Capital - Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 2019, 2018
and 2017
Consolidated Statements of Cash Flows - Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
110
112
113
114
115
117
The Supplementary Financial Information required by Item 302 of Regulation S-K is included in Note 20 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, 2019. 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, 2019 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, 2019 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, 2019 as stated in their report which is included elsewhere herein.
ITEM 9B. OTHER INFORMATION
None.
105
Report of Independent Registered Public Accounting Firm
To the Shareholders and the 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, 2019, 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, 2019, 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, 2019 and 2018, the related consolidated statements
of income and comprehensive income, changes in capital and cash flows for each of the three years in the period ended
December 31, 2019, and the related notes and financial statement schedules listed in the Index at Item 15(c) (collectively
referred to as the “financial statements”) of the Company and our report dated February 20, 2020, 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 20, 2020
106
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 2020 Annual Meeting of its Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A on or about April 10, 2020.
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 2020 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 10, 2020.
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 2020 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 10, 2020.
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 2020 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 10, 2020.
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 2020 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 10, 2020.
107
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, 2019 and 2018
Consolidated Statements of Changes in Capital – years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Income and Comprehensive Income – years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows – years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
(b) The exhibits required to be filed by Item 15(b) are listed herein in the Exhibit Index.
(c) Financial Statement Schedules. The following consolidated financial statement schedules of ProAssurance Corporation
and subsidiaries are included herein in accordance with Rule 14a-3(b):
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.
108
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 20th day of February 2020.
SIGNATURES
PROASSURANCE CORPORATION
By:
/S/ EDWARD L. RAND, JR.
Edward L. Rand, Jr.
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
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
/S/ EDWARD L. RAND, JR.
Edward L. Rand, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/S/ DANA S. HENDRICKS
Dana S. Hendricks
Chief Financial Officer
(Principal Financial and 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/ MAYE HEAD FREI
Director
Maye Head Frei
/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
109
Report of Independent Registered Public Accounting Firm
To the Shareholders and the 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, 2019 and 2018, the related consolidated statements of income and comprehensive income,
changes in capital and cash flows for each of the three years in the period ended December 31, 2019, and the related notes
and financial statement schedules listed in the Index at Item 15(c) (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, 2019 and 2018, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2019, 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, 2019, 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 20, 2020, 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which it relates.
Description of
the Matter
Valuation of reserve for losses and loss adjustment expenses
At December 31, 2019, the Company’s gross reserve for losses and loss adjustment expenses was $2.3
billion. As explained in Notes 1 and 8 to the financial statements, the reserve for losses and loss adjustment
expenses represents the estimated ultimate costs of all reported and unreported losses and loss adjustment
expenses incurred and unpaid as of the reporting date. The reserve for losses and loss adjustment expenses is
determined based on individual claims and payments thereon as well as actuarially determined estimates of
ultimate losses. The Company updates the data underlying the estimation of the reserve for losses each
reporting period and adjusts 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 Company’s loss and exposure data. The actuarial process is highly judgmental, both as to the
selection of the various actuarial methodologies, and the significant assumptions within those
methodologies, which are based on historical paid and incurred development trends, and in the interpretation
of the output of the various methods used.
Auditing management’s reserve for losses and loss adjustment expenses required the involvement of our
actuarial specialists and was complex and highly judgmental due to the sensitivity of the significant
assumptions which have a significant impact on the valuation of the reserve for losses and loss adjustment
expenses.
110
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested controls that address the risks of material
misstatement related to the valuation of the reserve for losses and loss adjustment expenses. This included
testing management’s controls over the review and approval processes that management has in place for the
methods and significant assumptions used in estimating the reserve.
To test the reserve for losses and loss adjustment expenses, we performed audit procedures that included,
among others, evaluating, with the assistance of our actuarial specialists, the Company’s selection of
methods against those used in prior periods and used in the industry for similar types of insurance. We
evaluated assumptions, based on historical paid and incurred loss development trends, relative to the
Company’s historical experience and to the extent required compared to industry experience. We involved
our actuarial specialists to independently calculate a range of reasonable losses and loss adjustment expense
reserve estimates and compared this range to the Company’s recorded reserve for losses and loss adjustment
expense. We also performed a review of the development of prior years’ reserve estimates.
/s/ Ernst & Young, LLP
We have served as the Company's auditor since 1977.
Birmingham, Alabama
February 20, 2020
111
ProAssurance Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Investments
Fixed maturities, available for sale, at fair value; amortized cost, $2,241,304 and
$2,116,825, respectively
Fixed maturities, trading, at fair value; cost, $46,772 and $38,445, respectively
Equity investments, at fair value; cost, $227,873 and $450,931, respectively
Short-term investments
Business owned life insurance
Investment in unconsolidated subsidiaries
Other investments, $36,018 and $31,344 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
Operating lease ROU assets
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
Operating lease liabilities
Other liabilities
Debt less unamortized debt issuance costs
Total Liabilities
Shareholders' Equity
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 63,117,235 and
62,989,421 shares issued, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of
$9,795 and ($4,355), respectively
Retained earnings
Treasury shares, at cost, 9,325,180 shares and 9,352,373 shares, respectively
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
See accompanying notes.
112
December 31,
2019
December 31,
2018
$ 2,288,785
47,284
250,552
339,907
66,112
358,820
38,949
3,390,409
175,369
249,540
12,739
390,708
42,796
55,567
44,387
30,410
21,074
70,757
210,725
111,118
$ 4,805,599
$ 2,093,798
38,188
442,937
308,319
64,096
367,757
34,287
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
$ 2,346,526
413,086
52,946
2,812,558
22,051
173,256
285,821
3,293,686
$ 2,119,847
415,211
55,614
2,590,672
—
199,295
287,757
3,077,724
631
384,551
630
384,713
36,955
1,505,738
(415,962)
1,511,913
$ 4,805,599
(16,911)
1,571,847
(417,277)
1,523,002
$ 4,600,726
ProAssurance Corporation and Subsidiaries
Consolidated Statements of Changes in Capital
(In thousands)
Balance at January 1, 2017
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
Balance at December 31, 2018
Cumulative-effect adjustment-
ASU 2018-07 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
$
627
Additional
Paid-in
Capital
$ 376,518
Accumulated
Other
Comprehensive
Income (Loss)
17,399
$
—
—
—
1
—
—
—
425
957
10,615
(5,438)
—
—
—
—
—
—
—
—
(2,488)
—
Retained
Earnings
$ 1,824,088
Treasury
Stock
Total
$(419,930) $ 1,798,702
(276)
—
149
—
—
—
(316,890)
—
107,264
1,923
—
—
—
—
—
(418,007)
2,880
10,615
(5,437)
(316,890)
(2,488)
107,264
1,594,795
628
383,077
14,911
1,614,186
—
—
—
—
2
—
—
—
—
—
314
5,258
(3,936)
—
—
—
630
384,713
—
—
—
1
—
—
—
—
(965)
3,512
(2,709)
—
—
—
—
8,334
3,416
(3,416)
—
—
—
—
(35,238)
—
(16,911)
—
—
—
(94,314)
—
47,057
1,571,847
—
—
730
—
—
—
—
—
(417,277)
8,334
—
1,044
5,258
(3,934)
(94,314)
(35,238)
47,057
1,523,002
(444)
—
(444)
—
—
—
—
—
53,866
—
—
—
—
(66,669)
—
1,004
1,315
—
—
—
—
350
3,512
(2,708)
(66,669)
53,866
—
1,004
$(415,962) $ 1,511,913
Balance at December 31, 2019
$
631
$ 384,551
$
36,955
$ 1,505,738
* See Note 1 of the Notes to Consolidated Financial Statements for discussion of accounting guidance adopted during the year.
See accompanying notes.
113
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
Year Ended December 31
2019
2018
2017
$
847,532
$
818,853
$
738,531
93,269
(10,061)
91,884
8,948
95,662
8,033
(978)
(490)
(13,200)
227
(751)
60,625
59,874
9,220
999,834
—
(490)
(42,998)
(43,488)
9,833
886,030
248
(12,952)
29,361
16,409
7,514
866,149
Net losses and loss adjustment expenses
753,915
593,210
469,158
Underwriting, policy acquisition and operating expenses:
Operating expense
DPAC amortization
Segregated portfolio cells dividend expense (income)
Interest expense
Total expenses
Income (loss) 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.
138,178
115,330
4,579
16,636
1,028,638
(28,804)
(1,165)
(28,643)
(29,808)
1,004
134,055
104,501
9,122
16,117
857,005
29,025
(6,208)
(11,824)
(18,032)
47,057
53,866
54,870
$
(35,238)
11,819
0.02
0.02
$
$
53,740
53,841
0.88
0.88
53,598
53,749
$
$
$
1.24
$
1.74
$
$
$
$
$
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
5.93
114
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
2019
2018
2017
$
1,004
$
47,057
$
107,264
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.
115
18,665
(2,016)
(59,874)
3,527
(28,643)
(1,451)
10,061
25,849
2,175
11,926
(52,902)
(13,481)
226,679
(2,125)
8,772
148,166
(695,552)
(8,254)
(116,092)
(28,851)
(357)
(69,411)
568,572
359,727
29,017
42,478
(30,718)
(6,455)
(9,586)
16,009
(5)
50,522
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
Continued from the previous page.
Financing Activities
Borrowings (repayments) under Revolving Credit Agreement
Proceeds (repayments) of Mortgage Loans
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
Operating ROU assets obtained in exchange for operating lease liabilities
Dividends declared and not yet paid
See accompanying notes.
Year Ended December 31
2019
2018
2017
—
(1,447)
(93,204)
(5,024)
(4,115)
(103,790)
94,898
80,471
(123,000)
(1,396)
(316,476)
(1,005)
(4,309)
(446,186)
(54,024)
134,495
$
175,369
$
80,471
$
(77,000)
40,460
(315,228)
2,936
(7,683)
(356,515)
17,148
117,347
134,495
$
$
$
$
2,748
14,294
5,436
16,676
$
$
$
$
5,726
16,165
$
$
17,193
15,892
— $
—
43,446
$
267,292
116
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 provides capital
to Syndicate 1729 and is the sole (100%) capital provider of an SPA, Syndicate 6131, at Lloyd's. Risks insured are primarily
liability risks located within the U.S.
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 17.
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 lag 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.
Certain 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 $1.6 million and $1.3 million for the years
ended December 31, 2019 and 2018, respectively. Estimated credit losses and actual credit write-offs, net of recoveries, were
$0.3 million during the year ended December 31, 2019 and nominal in amount during the year ended December 31, 2018.
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
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, 2019 and 2018, ProAssurance carried EBUB of
$4.3 million as a part of premiums receivable.
117
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 and social 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 typically required both to assess the viability of a claim and potential
damages, if any, and to reach a resolution of the claim. 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 2019, 2018 and 2017.
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. See Note 5 for further information.
118
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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.
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.
ProAssurance evaluates the recoverability of DPAC typically at the segment level each reporting period, or in a manner
that is consistent with the way the Company manages its business. Any amounts estimated to be unrecoverable are charged to
expense in the current period. As part of the evaluation of the recoverability of DPAC, ProAssurance also evaluates unearned
premium for premium deficiencies. A premium deficiency is recognized if the sum of anticipated losses and loss adjustment
expenses, unamortized DPAC and maintenance costs, net of anticipated investment income, exceeds the related unearned
premium. If a premium deficiency is identified, the associated DPAC is written off, and a PDR is recorded for the excess
deficiency as a component of net losses and loss adjustment expenses in the Consolidated Statement of Income and
Comprehensive Income and as a component of the reserve for losses on the Consolidated Balance Sheet.
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.
119
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 and in Note 2. Exclusive of OTTI
losses, discussed in a separate section that follows, unrealized holding gains and losses on available-for-sale securities are
included, net of related tax effects, as a component of OCI in the Consolidated Statement of Income and Comprehensive
Income during the period of change and as a component AOCI in shareholders' equity on the Consolidated Balance Sheet.
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 unrealized holding gains and losses
included as a component of net realized investment gains (losses) in the Consolidated Statement of Income and Comprehensive
Income during the period of change.
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) in the Consolidated Statement of Income and Comprehensive Income
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.
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 in the Consolidated Statement of Income and
Comprehensive Income as either a reduction to current tax expense or as a component of deferred tax expense if they cannot be
utilized in the period received.
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.
120
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019 and 2018 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:
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
121
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
• 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 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.
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, 2019, 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.
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, 2019 or 2018.
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, tax credit carryforwards, 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
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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. ProAssurance has also established a valuation allowance against the deferred tax assets of certain SPCs at its
wholly owned Cayman Islands reinsurance subsidiary, Inova Re, as these 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.
Leases
ProAssurance is involved in a number of leases, primarily for office facilities. The Company determines if an arrangement
is a lease at the inception date of the contract and classifies all leases as either financing or operating. Due to the adoption of
ASU 2016-02 (see further discussion that follows), operating leases are included in operating lease ROU assets and operating
lease liabilities on the Consolidated Balance Sheet as of December 31, 2019. The ROU asset represents the right to use the
underlying asset for the lease term. As of December 31, 2019, ProAssurance has no leases that are classified as financing leases.
Operating ROU assets and operating lease liabilities are initially recognized as of the lease commencement date based on
the present value of the remaining lease payments, discounted over the term of the lease using a discount rate determined based
on information available as of the commencement date. As the majority of ProAssurance's lessors do not provide an implicit
discount rate, the Company uses its collateralized incremental borrowing rate in determining the present value of remaining
lease payments. Due to the adoption of ASU 2016-02 (see further discussion that follows), the Company used its collateralized
incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. Subsequent to the
initial recognition, the operating ROU asset and operating lease liability are amortized and accreted, respectively, over the lease
term in a manner that results in a straight-line operating lease expense. Operating lease expense is included as a component of
operating expense on the Consolidated Statements of Income and Comprehensive Income for the year ended December 31,
2019 and 2018. Leases with an initial term of twelve months or less are considered short-term and are not recorded on the
Consolidated Balance Sheet; lease expense for these leases is also recognized on a straight-line basis over the lease term.
Additionally, for leases entered into or reassessed after the adoption of ASU 2016-02, ProAssurance accounts for lease and non-
lease components of a contract as a single lease component.
Operating lease ROU assets are evaluated for impairment at the asset group level whenever events or changes in
circumstances indicate that the carrying amount of the asset group may not be recoverable. The carrying amount of an asset
group, which includes the operating lease ROU asset and the related operating lease liability, is not recoverable if the carrying
amount exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group over the life of the
primary asset in the asset group. That assessment is based on the carrying amount of the asset group, including the operating
lease ROU asset and the related operating lease liability, at the date it is tested for recoverability and an impairment loss is
measured and recognized as the amount by which the carrying amount of the asset group exceeds its fair value. Any impairment
loss is allocated to each asset in the asset group, including the operating ROU asset.
When a lease of an office facility is to be abandoned and will not be subleased, the Company first evaluates whether or
not the operating lease ROU asset’s inclusion in an existing asset group continues to be appropriate and if the commitment to
abandon the lease constitutes a change in circumstances requiring the operating lease ROU asset, or the larger asset group, to be
tested for impairment. If an impairment test is required, it is performed in the same manner as discussed above. Any remaining
carrying value of the operating lease ROU asset is amortized from the date the Company commits to a plan to abandon the lease
to the expected date that the Company will cease to use the leased property. Leases to be abandoned in which the Company has
the intent or practical ability to sublease continue to be accounted for under a held and use model, with no change to the
amortization period of the operating lease ROU asset, and are evaluated for impairment as a separate asset group at the date the
sublease is executed.
123
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 $25.7 million and $25.2 million at December 31, 2019 and
2018, respectively. Real estate depreciation expense was $1.0 million, $1.2 million and $1.1 million for the years ended
December 31, 2019, 2018 and 2017, 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 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)
2019
2018
2019
2018
2019
2018
2017
Intangible Assets
Non-amortizable
Amortizable
$
$
25.8
97.7
25.8
97.5
Total Intangible Assets
$ 123.5
$ 123.3
$
52.7
$
46.5
$
6.1
$
6.2
$
5.8
Aggregate amortization expense for intangible assets is estimated to be $6.1 million for the year ended December 31,
2020, $6.0 million for each of the years ended December 31, 2021, 2022 and 2023 and $5.7 million for the year ended
December 31, 2024.
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 17. 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
reporting unit is less than its carrying amount. If management elects to perform a qualitative assessment and determines that an
impairment is more likely than not, management is then required to perform the two-step quantitative impairment test;
otherwise, no further analysis is required. Management also may elect not to perform the qualitative assessment and, instead,
proceed directly to the two-step quantitative impairment test.
In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is 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
124
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 of the most recent evaluation date on October 1, 2019, management performed a qualitative goodwill impairment test
for the Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments. The Specialty
P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments have historically had an excess of
fair value over book value and based on current operations are expected to continue to have an excess of fair value over book
value; therefore, management's annual impairment test for the three segments was performed qualitatively. In applying the
qualitative approach, management considered macroeconomic factors, industry and market conditions, cost factors that could
have a negative impact on the reporting units, actual financial performance of the reporting units versus expectations and
management’s future business expectations. As a result of the qualitative assessments, management concluded that it was not
more likely than not that the fair value of the reporting unit was less than its carrying value as of the testing date; therefore, no
further impairment testing was required. No goodwill impairment was recorded in 2019, 2018 or 2017.
Other Liabilities
Other liabilities at December 31, 2019 and 2018 consisted of the following:
(In thousands)
SPC dividends payable
Unpaid shareholder dividends
All other
Total other liabilities
$
2019
55,763
16,676
100,817
2018
$
53,604
43,446
102,245
$ 173,256
$ 199,295
SPC dividends payable represents the undistributed equity contractually payable to the external cell participants of SPCs
operated by ProAssurance's Cayman Islands subsidiaries, Inova Re and Eastern Re.
Unpaid dividends represent common stock dividends declared by ProAssurance's Board that had not yet been paid.
Unpaid dividends at December 31, 2018 included a special dividend declared in the fourth quarter of 2018 that was paid in
January 2019.
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, 2019 for recognition or disclosure in its
Consolidated Financial Statements. See Note 21 for further discussion of subsequent events.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Accounting Changes 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
adopted the guidance as of January 1, 2019 using a modified retrospective application and elected the transition option provided
that allows companies to continue to apply legacy GAAP in comparative periods. Also, ProAssurance elected the package of
practical expedients permitted under the guidance, which allowed 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 existed
prior to adoption of the new standard. Furthermore, ProAssurance elected 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 recognized total ROU assets and total lease liabilities of approximately $19 million 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 had 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 had 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 did not adopt the principles found in ASU
2016-02, adoption of the guidance had 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 requires the premium for certain callable debt securities to be amortized over a shorter period than was
previously required. Previously, amortization was permitted over the contractual life of the instrument, and the guidance
shortened 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 adopted the guidance as
of January 1, 2019. As ProAssurance amortizes the premium on callable debt securities to the earliest call date, adoption of the
guidance had no 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 eliminated 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 adopted the guidance as of January 1, 2019. ProAssurance's derivative
instrument at December 31, 2019 is not designated as a hedging instrument; therefore, adoption had no material effect on
ProAssurance's results of operations, financial position or cash flows.
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 adopted the guidance as of January 1, 2019
using a modified retrospective application and recorded a cumulative-effect adjustment of approximately $0.4 million to
beginning retained earnings in the consolidated Statement of Changes in Capital for the year ended December 31, 2019.
Adoption had no 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.
126
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
benchmark interest rate for hedge accounting purposes. ProAssurance adopted the guidance as of January 1, 2019. As of
December 31, 2019, ProAssurance's derivative instrument is not designated as a hedging instrument; therefore, adoption had no
material effect on ProAssurance's results of operations, financial position or cash flows.
Accounting Changes Not Yet Adopted
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 will reflect the initial
recognition of lifetime expected credit losses for any 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 required to 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. Adoption of this guidance is not expected to have a material impact on ProAssurance's available-
for-sale fixed maturity portfolio. In addition, ProAssurance's premiums receivable and receivables from reinsurers are also
included in the scope of this new guidance; however, ProAssurance has not historically experienced material credit losses due
to the financial condition of an insured or reinsurer. Subsequent to issuing ASU 2016-13, the FASB has issued additional
standards for the purpose of clarifying certain aspects of ASU 2016-13, as well as providing codification improvements and
targeted transition relief under the standard. ProAssurance plans to adopt this guidance beginning January 1, 2020 using a
modified retrospective application for the portion of the new guidance that relates to its premiums and reinsurance receivables
and a prospective application for the portion of the new guidance that relates to its available-for-sale fixed maturity securities.
Upon adoption, ProAssurance estimates that it will record a cumulative-effect adjustment of between $4 million to $6 million,
net of related tax impacts, to beginning retained earnings as of January 1, 2020 to increase its consolidated allowance for credit
losses related to its premiums receivable, which was $1.6 million at December 31, 2019. The Company does not consider this
adjustment to its allowance to be material to its financial position. In addition, ProAssurance had no allowance for credit losses
related to its reinsurance receivables at December 31, 2019, and expects that its allowance for credit losses associated with its
reinsurance receivables upon adoption of this new guidance will be nominal.
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 which is
expected to reduce the complexity and cost of future tests of goodwill for impairment. 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. During the third quarter of 2018, ProAssurance 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.
127
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019,
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.
Simplifying the Accounting for Income Taxes (ASU 2019-12)
Effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, the FASB
issued new guidance which is intended to simplify various aspects related to accounting for income taxes. In addition, it
removes certain exceptions to the general principles in the income tax guidance in the codification and also clarifies and
amends existing guidance to improve consistent application. ProAssurance plans to adopt the guidance beginning January 1,
2021, and adoption is not expected to have a material effect on ProAssurance's results of operations, financial position or cash
flows.
Clarifying the Interactions between Investments - Equity Securities, Investments - Equity Method and Joint Ventures, and
Derivatives and Hedging (ASU 2020-01)
Effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, the FASB
amended guidance that clarifies the accounting for the transition into and out of the equity method and measuring certain
purchased options and forward contracts to acquire investments. ProAssurance plans to adopt the guidance beginning January
1, 2021, and adoption is not expected to have a material effect on ProAssurance's results of operations, financial position or
cash flows.
128
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019 and December 31, 2018 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.
129
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
(In thousands)
Level 1
Level 2
Level 3
Fair Value
December 31, 2019
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
$
110,467
— $
17,340
—
296,093
—
— 1,335,285
—
—
208,408
—
8,221
—
71,868
—
233,032
—
47,284
—
40,294
21,195
29,288
26,440
58,346
52,512
317,313
219
—
$ 545,607
—
—
—
—
—
—
22,594
32,713
760
$ 2,384,065
$
$
110,467
— $
17,340
—
296,093
—
— 1,335,285
5,079
208,408
8,221
71,868
236,024
47,284
5,079
—
—
—
2,992
—
—
—
—
—
—
—
—
3,086
—
11,157
40,294
21,195
29,288
26,440
58,346
52,512
339,907
36,018
760
2,940,829
22,477
270,524
$ 3,233,830
130
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
(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
$
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
December 31, 2018
Fair Value Measurements Using
Total
Level 1
Level 2
Level 3
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
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, 2019 and 2018.
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.
131
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, corporate
debt with multiple observable inputs and residential mortgage-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 12, 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 determined by management if not available. At December 31, 2019, 66% of the securities were
rated and the average rating was BBB-. At December 31, 2018, 54% of the securities were rated and the average rating was
BBB+.
132
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019, 100% of the
securities were rated and the average rating was AA. At December 31, 2018, 25% 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,
2019 and December 31, 2018. 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, 2019
December 31, 2018
Valuation Technique
Unobservable
Input
Range
(Weighted Average)
Assets:
Corporate debt, limited
observable inputs
$5,079
$4,322
Other asset-backed
securities
$2,992
$3,850
Market Comparable
Securities
Discounted Cash Flows
Market Comparable
Securities
Discounted Cash Flows
Other investments
$3,086
$3
Discounted Cash Flows
Comparability
Adjustment
Comparability
Adjustment
Comparability
Adjustment
Comparability
Adjustment
Comparability
Adjustment
0% - 5% (2.5%)
0% - 5% (2.5%)
0% - 5% (2.5%)
0% - 5% (2.5%)
0% - 10% (5%)
The significant unobservable inputs used in the fair value measurement of the above listed securities were the valuations
of comparable securities with similar issuers, credit quality and maturity. Changes in the availability of comparable securities
could result in changes in the fair value measurements.
133
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2018
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, 2019
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, 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
$
$
Transfers
December 31, 2019
Level 3 Fair Value Measurements – Assets
Corporate
Debt
Asset-backed
Securities
$
4,322
$
3,850
Other
investments
3
$
Total
$
8,175
2
—
37
3,575
(3,702)
3,095
(2,250)
5,079
$
(204)
—
202
—
(494)
2,216
(2,578)
2,992
$
—
151
—
3,091
(172)
418
(405)
3,086
— $
— $
164
$
$
(202)
151
239
6,666
(4,368)
5,729
(5,233)
11,157
164
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
— $
— $
— $
—
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 2019 and 2018 were to or from Level 2.
All transfers in and out of Level 3 during 2019 and 2018 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.
134
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Fair Values Not Categorized
At December 31, 2019 and 2018, 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, 2019 and fair values of
these investments as of December 31, 2019 and 2018 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)
Unfunded
Commitments
December 31,
2019
Fair Value
December 31,
2019
December 31,
2018
$
$
$
$
$
— $
22,477
$
20,292
11,886
None
None
73,366
None
2,048
None
44,135
19,011
5,293
30,542
120,343
1,951
42,415
14,519
36,450
270,524
18,196
6,561
28,805
114,811
9,322
29,164
12,958
48,619
268,436
Total investments carried at NAV
$
293,001
$
288,728
Below is additional information regarding each of the investments listed in the table above as of December 31, 2019.
(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, collateralized loan obligations and other
private equity-oriented LPs. Two of the LPs allow redemption by terms set forth in the LP agreements; the others do
not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP over time
frames that are anticipated to span up to ten years.
135
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
(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 four 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. A
third fund focuses on private middle market company mezzanine loans, while 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 and one fund does not allow redemptions. For the fund that does not allow redemptions, income and capital are
to be periodically distributed at the discretion of the LP over time frames that are anticipated to span up to twelve
years.
(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. A second fund is focused on aircraft investments, along with components and assets related to aircrafts.
For both funds, 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, 2019 and 2018, ProAssurance did not have any assets or liabilities that were measured at fair value on a
nonrecurring basis.
Financial Instruments - Methodologies Other Than Fair Value
The following table provides the estimated fair value of the Company's financial instruments that, in accordance with
GAAP for the type of investment, are measured using a methodology other than fair value. 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*
Mortgage Loans*
Other liabilities
December 31, 2019
December 31, 2018
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
$
$
$
$
$
66,112
2,931
28,645
250,000
37,617
27,953
$
$
$
$
$
$
66,112
2,931
28,650
273,865
37,617
27,953
$
$
$
$
$
$
64,096
2,943
35,921
250,000
39,064
21,300
$
$
$
$
$
$
64,096
2,943
35,468
264,810
39,064
21,300
* Carrying value excludes unamortized debt issuance costs.
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.
136
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 $26.9 million and $24.1 million at December 31,
2019 and 2018, 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.
137
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
3. Investments
Available-for-sale fixed maturities at December 31, 2019 and December 31, 2018 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, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Estimated Fair
Value
$
109,060
$
1,533
$
126
$
110,467
17,215
287,658
1,308,889
205,588
8,054
70,621
234,219
$ 2,241,304
$
125
9,110
33,050
3,139
182
1,468
1,958
50,565
—
675
17,340
296,093
1,575
1,340,364
319
15
221
208,408
8,221
71,868
153
3,084
236,024
$ 2,288,785
$
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
196,583
25
4,877
3,328
814
12
38
254
429
649
24,430
4,039
200
375
1,180
35,354
293,772
1,223,475
181,238
13,108
30,993
195,657
$ 2,116,825
$
9,679
$
32,706
$ 2,093,798
138
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
The recorded cost basis and estimated fair value of available-for-sale fixed maturities at December 31, 2019, 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
$ 109,060
$
28,954
$
64,881
$
16,210
$
422
$ 110,467
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
17,215
287,658
2,501
14,393
1,308,889
147,624
5,995
120,928
778,833
8,700
126,448
385,984
144
34,324
27,923
17,340
296,093
1,340,364
205,588
8,054
70,621
234,219
$ 2,241,304
208,408
8,221
71,868
236,024
$ 2,288,785
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, 2019.
Cash and securities with a carrying value of $45.5 million at December 31, 2019 were on deposit with various state
insurance departments to meet regulatory requirements.
As a member of Lloyd's, ProAssurance is required to maintain capital at Lloyd's, referred to as FAL, to support
underwriting by Syndicate 1729 and Syndicate 6131. At December 31, 2019, ProAssurance's FAL investments were comprised
of available-for-sale fixed maturities with a fair value of $129.9 million and cash and cash equivalents of $7.2 million on
deposit with Lloyd's in order to satisfy these FAL requirements.
139
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019 and December 31, 2018, 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, 2019
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
$
25,959
$
126
$
15,305
$
State and municipal bonds
Corporate debt
Residential mortgage-backed
securities
Agency commercial mortgage-
backed securities
Other commercial mortgage-
backed securities
Other asset-backed securities
36,565
128,254
675
1,575
59,291
459
18,339
48,912
319
15
221
153
35,621
88,582
28,048
158
16,924
37,322
103
674
932
63
—
206
145
$
10,654
$
944
39,672
31,243
301
1,415
11,590
23
1
643
256
15
15
8
$ 317,779
$
3,084
$ 221,960
$
2,123
$
95,819
$
961
(In thousands)
Fixed maturities, available for sale
Total
December 31, 2018
Less than 12 months
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
12 months or longer
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
33,677
63,094
938,651
429
648
20,479
30,924
126
143
13,198
32,170
303
505
24,429
447,891
8,804
490,760
15,625
157,120
4,039
27,311
209
129,809
3,830
9,822
200
4,566
22,924
142,470
375
1,181
13,348
70,218
22
164
236
5,256
9,576
72,252
178
211
945
$ 1,465,727
$
32,706
$ 634,958
$
9,823
$ 830,769
$
22,883
As of December 31, 2019, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were
263 debt securities (12.1% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing
204 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.2 million
and $0.1 million, respectively. The securities were evaluated for OTTI as of December 31, 2019.
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.
140
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019, 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, 2019 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
2019
2018
2017
$
$
177.1 $
695.6 $
599.6 $
780.7 $
530.2
614.4
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, 2019 primarily included stocks, bond funds 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)
2019
2018
2017
Year Ended December 31
Fixed maturities
Equities
Short-term investments, including Other
BOLI
Investment fees and expenses
Net investment income
$
72,593
$
69,515
$
17,650
7,493
2,017
(6,484)
93,269
$
21,418
5,649
1,983
(6,681)
91,884
$
$
75,669
17,198
7,793
1,979
(6,977)
95,662
141
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019
Carrying Value
Percentage
Ownership
December 31,
2019
December 31,
2018
See below
See below
$
46,421
$
2,085
See below
310,314
$
358,820
$
65,677
3,757
298,323
367,757
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 $17.2 million and $25.0 million at December 31, 2019 and 2018, respectively. ProAssurance's ownership
percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of
$29.2 million and $40.7 million at December 31, 2019 and 2018, 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 15.
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 15.
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 three of the LPs/LLCs is greater than
25%, which is expected to be reduced as the funds mature and other investors participate in the funds; these investments had a
carrying value of $41.0 million at December 31, 2019 and $25.9 million at December 31, 2018. ProAssurance's ownership
percentage relative to the remaining investments and LPs/LLCs is less than 25%; these interests had a carrying value of $269.3
million at December 31, 2019 and $272.4 million at December 31, 2018. 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)
2019
2018
2017
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
$
$
$
$
19,231
21,933
$
$
18,889
18,474
1,672
$
— $
5,434
2,567
$
$
$
$
14,297
17,774
6,355
5,337
142
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Due to the consolidated loss before income taxes recognized for the year ended December 31, 2019, the tax credits
generated in 2019 from tax credit partnership investments of $18.1 million were deferred and are expected to be utilized in
future periods. Tax credits in the previous table recognized during the year ended December 31, 2019 included tax credits of
$3.8 million that were carried forward from 2018, which had previously been carried back to the 2017 tax year; however
because the Company expects to carryback the tax loss for the year ended December 31, 2019 to the 2017 tax year, a portion of
those tax credits have been recaptured. Of the $3.8 million of tax credits recaptured and recognized during the year ended
December 31, 2019, $0.2 million was recognized as a current income tax benefit and $3.6 million was recognized as a deferred
income tax benefit in 2019. See Note 6 for further information.
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
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
2019
2018
2017
$
— $
— $
(978)
—
(490)
—
227
(751)
3,786
(538)
3
74
20,577
1,626
705
30,674
3,653
65
59,874
$
—
(490)
5,942
(5,799)
(1)
(100)
12,230
1,340
(317)
(52,707)
(3,849)
263
$ (43,488) $
(850)
(419)
(11,931)
248
(12,952)
6,653
(3,123)
(2)
—
10,724
2,963
—
11,243
896
7
16,409
During 2019, ProAssurance recognized credit-related OTTI in earnings of $0.8 million and non-credit OTTI in OCI of
$0.2 million, both of which related to three corporate bonds in the energy and consumer sectors.
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.
143
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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)
2019
2018
2017
$
93
$
1,313
$
1,158
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)
377
—
—
Balance December 31
$
470
$
—
—
171
—
(1,220)
93
$
(16)
1,313
144
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
4. Retroactive Insurance Contracts
ProAssurance offers custom alternative risk solutions including loss portfolio transfers for healthcare entities that, 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. If the contract includes both prospective (tail) coverage
and retroactive coverage, ProAssurance bifurcates the provisions of the contract and accounts for each component separately.
Retroactive and prospective (tail) coverages are fully written and earned as of the contract effective date. For additional
information regarding ProAssurance's accounting policy for retroactive insurance contracts, see Note 1.
During 2019, ProAssurance entered into a loss portfolio transfer with a regional hospital group to cover a specific
inventory of existing claims as well as provide tail coverage. During 2018, ProAssurance entered into a loss portfolio transfer
with a large healthcare organization to also cover a specific inventory of existing claims as well as provide tail coverage. The
impact of each of these loss portfolio transfers on the Consolidated Statements of Income and Comprehensive Income for the
years ended December 31, 2019 and 2018 is as follows:
(In millions)
Retroactive coverage
Prospective (tail) coverage
Net premiums earned
Net losses and loss adjustment expenses
Year Ended December 31
2019
2018
0.9
1.8
2.7
2.1
$
$
$
18.7
7.9
26.6
25.4
$
$
$
For the loss portfolio transfer entered into during 2018, ProAssurance recorded a deferred gain of $0.6 million which is
included as a component of the reserve for losses and loss adjustment expenses on the Consolidated Balance Sheet. This
deferred gain represented the excess of premiums received over losses assumed related to the retroactive coverage which is
amortized into earnings over the estimated claim payment period. Amortization of this deferred gain was insignificant during
each of the years ended December 31, 2019 and 2018.
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, 2019, 2018 and 2017 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
2019
919,799
47,691
(124,765)
842,725
926,035
45,668
(124,171)
847,532
871,780
(117,865)
753,915
$
$
$
$
$
$
2018
2017
$
910,198
$
842,968
47,113
(122,397)
834,914
903,354
41,535
(126,036)
818,853
675,784
(82,574)
593,210
$
$
$
$
$
31,908
(110,858)
764,018
821,249
27,629
(110,347)
738,531
592,218
(123,060)
469,158
$
$
$
$
$
145
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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. Certain of the Company's 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 in its Specialty P&C segment by $2.8 million and $5.5 million during the years ended
December 31, 2019 and 2018, respectively, and reduced premiums ceded by $1.2 million during the year ended December 31,
2017.
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, 2019, the net total amounts due from reinsurers was $393.3 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 $40.0 million.
At December 31, 2019 reinsurance recoverables totaling approximately $92.6 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,
2019 or 2018 as all reinsurance balances were considered collectible. During the years ended December 31, 2019 and 2018, 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 the fourth quarter of 2018, 2017 and 2016, ProAssurance commuted the 2017, 2016 and 2015 calendar year quota
share reinsurance arrangements, respectively, between the Specialty P&C segment and Syndicate 1729. Due to the quarter lag,
the effects of the 2017, 2016 and 2015 commutations were reported in both the Specialty P&C and Lloyd's Syndicates segments
results during the first quarter of 2019, 2018 and 2017, respectively, which resulted in a net cash receipt of approximately $3.1
million, $6.1 million and $6.3 million, respectively. The commutations reduced the receivable from reinsurers on unpaid losses
and LAE, combined, by approximately $3.8 million, $6.7 million and $6.6 million during the years ended December 31, 2019,
2018 and 2017, 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.
146
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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:
Deferred tax assets
Unpaid loss discount
(In thousands)
Unearned premium adjustment
Compensation related
Unrealized losses on investments, net
Basis differentials–investments
Intangibles
Operating lease liabilities
Basis differentials - foreign operations
Tax credit carryforward
Net operating loss carryforward
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
Operating lease ROU assets
Basis differentials–investments
Intangibles
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
December 31
2019
2018
$
34,455
$
16,346
10,041
—
—
591
4,631
126
21,778
7,682
95,650
(5,479)
90,171
(9,889)
(7,557)
(9,753)
(1,263)
(4,439)
(2,377)
(10,382)
(124)
(45,784)
44,387
$
$
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
As of December 31, 2019, ProAssurance had U.S. federal, state, and U.K. income tax NOL carryforwards of
approximately $10.1 million, $7.9 million, and $28.6 million, respectively. The federal and U.K. NOL carryforwards do not
expire while the state NOL carryforwards will begin to expire in 2031.
ProAssurance had $21.8 million of available tax credit carryforwards generated from the Company's investments in tax
credit partnerships, of which $3.7 million and $18.1 million may be carried forward until December 31, 2038 and 2039,
respectively. These tax credits have been deferred and carried forward due to the Company's consolidated pre-tax loss in 2019.
In 2019 and 2018, 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 2019 and 2018 of
$4.9 million and $6.8 million, respectively. The decrease in the valuation allowance of $1.9 million related to the U.K. NOL
carryforward in 2019 as compared to 2018 was primarily due to a reduction in the U.K. tax rate from 19% to the current tax rate
of 17%.
Deferred tax assets and liabilities include SPCs the Company participates in at Inova Re, net of a valuation allowance of
$0.6 million and $0.3 million at December 31, 2019 and 2018, respectively. Due to the limited operations of these SPCs as of
December 31, 2019 and 2018, management concluded that a valuation allowance was required against the DTAs of certain
SPCs. The increase in the valuation allowance of $0.3 million related to the SPCs at Inova Re is due to current year activity.
147
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 $8.0 million at December 31, 2019 and $3.5 million at December 31,
2018, both carried as a part of other assets.
The statute of limitations is now closed for all tax years prior to 2016.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2019, 2018 and 2017, were as
follows:
(In thousands)
2019
2018
2017
Balance at January 1
$
3,601
$
5,341
$
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
1,749
—
—
—
(777)
(800)
(280)
5,070
$
(163)
3,601
$
$
8,353
—
(3,500)
700
(212)
5,341
At both December 31, 2019 and 2018, approximately $1.2 million 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, 2019 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 as a component of income tax expense.
Interest and penalties recognized in the Consolidated Statements of Income and Comprehensive Income was nominal for each
of the years ended December 31, 2019 and 2018 and was approximately $0.3 million for the year ended December 31, 2017.
The accrued liability for interest was approximately $0.6 million at both December 31, 2019 and 2018.
Income tax expense (benefit) for each of the years ended December 31, 2019, 2018 and 2017 consisted of the following:
(In thousands)
2019
2018
2017
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)
$
$
(2,147) $
982
(1,165)
(6,509) $
301
(6,208)
(27,404)
(1,239)
(28,643)
(29,808) $
(11,765)
(59)
(11,824)
(18,032) $
19,546
120
19,666
1,331
362
1,693
21,359
148
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
A reconciliation of “expected” income tax expense (benefit) (21% of income (loss) before income taxes for 2019 and
2018; 35% of income before income taxes for 2017) to actual income tax expense (benefit) for each of the years ended
December 31, 2019, 2018 and 2017 were as follows:
(In thousands)
2019
2018
2017
Computed “expected” tax expense (benefit)
$
Tax-exempt income
Tax credits
Non-U.S. operating results
Excess tax benefit on share-based compensation
Change in federal corporate tax rate
Tax rate differential on loss carryback
Change in limitation of future deductibility of
certain executive compensation
Provision-to-return differences
Change in uncertain tax positions
State income taxes
Benefit from amended returns
Other
Total income tax expense (benefit)
$
(6,049) $
(1,528)
(21,933)
(1,447)
99
—
(3,400)
—
3,595
1,956
(376)
(550)
(175)
(29,808) $
$
6,095
(2,505)
(21,059)
2,269
(275)
—
—
—
(2,309)
(51)
129
—
(326)
(18,032) $
45,018
(8,356)
(23,111)
918
(2,762)
6,541
—
3,497
(1,979)
345
589
—
659
21,359
For the year ended December 31, 2019, tax credits include $0.2 million recognized as a current income tax benefit and
$21.8 million that have been recognized as a deferred income tax benefit. The tax rate differential on loss carryback for the year
ended December 31, 2019 represents the impact of the carryback of the Company's tax loss in 2019 to the 2017 tax year when
the federal statutory tax rate was 35% as compared to the current tax rate of 21%.
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 wholly owned Cayman Islands reinsurance subsidiary, Inova Re, do
not fall within the scope of base erosion payments as the SPCs at Inova Re have elected 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 subsidiary, Inova Re, and its Cayman Islands SPC operations in Note 17. 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, 2019.
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. ProAssurance recognized a nominal amount of tax expense for the GILTI
provision of the TCJA during year ended December 31, 2019.
149
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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
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, 2018 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 (benefit). 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.
150
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 $115.3 million, $104.5 million and $95.8 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
ProAssurance evaluates the recoverability of DPAC typically at the segment level each reporting period, or in a manner
that is consistent with the way the Company manages its business. Any amounts estimated to be unrecoverable are charged to
expense in the current period as a component of DPAC amortization in the Consolidated Statement of Income and
Comprehensive Income.
As part of the evaluation of the recoverability of DPAC, ProAssurance also evaluates its unearned premiums for premium
deficiencies. A premium deficiency is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized
DPAC and maintenance costs, net of anticipated investment income, exceeds the related unearned premium. If a premium
deficiency is identified, the associated DPAC is charged to expense as a component of DPAC amortization in the Consolidated
Statement of Income and Comprehensive Income, and a PDR is recorded for the excess deficiency as a component of net losses
and loss adjustment expenses in the Consolidated Statement of Income and Comprehensive Income and as a component of the
reserve for losses on the Consolidated Balance Sheet. For the year ended December 31, 2019, ProAssurance established a $9.2
million PDR and a nominal amount of DPAC was charged to expense as it was determined to be unrecoverable.
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 premium rates, claims
frequency and severity, historical paid and incurred loss development trends, the expected effect of inflation, general economic
and social trends and the legal and political environment 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. For
claims-made policies, the insured event generally becomes a liability when the event is first reported to the Company. 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. 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.
151
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 (Incurred)
Development Method, Average Paid Value Method, Average Reported Value 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 (Incurred) Development Method, Paid Loss Development
Method and Bornhuetter-Ferguson Method, to develop the reserve for each accident year. The actuarial review includes the
stratification of claims data (lost time claims and medical only claims) using different variations that allow for identification of
trends that may not be readily identifiable if the data was evaluated only in the aggregate. Reported and paid loss development
factors are key assumptions in the reserve estimation process and are based on ProAssurance’s historical reported 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, 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.
152
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Activity in the reserve for losses and loss adjustment expenses is summarized as follows:
Balance, beginning of year
(In thousands)
2019
2,119,847
$
2018
2017
$
2,048,381
$
1,993,428
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
343,820
1,776,027
335,585
1,712,796
273,475
1,719,953
765,698
685,326
603,518
(11,783)
753,915
(92,116)
593,210
(134,360)
469,158
(115,133)
(458,991)
(574,124)
1,955,818
(117,268)
(412,711)
(529,979)
1,776,027
(106,633)
(369,682)
(476,315)
1,712,796
Plus reinsurance recoverables on unpaid losses and loss
adjustment expenses
Balance, end of year
390,708
343,820
335,585
$
2,346,526
$
2,119,847
$
2,048,381
* Current year net losses in 2019 included a PDR of $9.2 million associated with the unearned premium of a large national
healthcare account in the Company's Specialty P&C segment (see Note 7). 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 net favorable loss development recognized in 2019 primarily
reflected overall favorable trends in claim closing patterns in the Workers' Compensation Insurance and Segregated Portfolio
Cell Reinsurance segments, largely offset by net unfavorable loss development recognized in the Specialty P&C segment. The
net favorable loss development recognized in the Workers' Compensation Insurance segment primarily related to the 2015 and
2016 accident years and the net favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment
primarily related to the 2015 through 2018 accident years. The net unfavorable loss development recognized in the Specialty
P&C segment primarily related to accident years 2016 through 2018. The net favorable development recognized in 2018 and
2017 was primarily due to lower than anticipated claims severity trends for accident years 2011 through 2015 and accident
years 2010 through 2014, respectively, in the Specialty P&C segment.
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
153
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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
reinsurance - workers' compensation lines of business, virtually all other acquired entities are captured within the HCPL line of
business.
All information prior to 2019 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.
154
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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 based upon the evaluation of
the current loss environment including frequency, severity, economic inflation, social inflation and legal trends. The initial loss
ratio for HCPL business has ranged from 87% to 106% in recent years and has recently trended towards the higher end of this
range due to increased reserve estimates for a large national healthcare account as well as increases in loss severity in the
broader HCPL industry, including our excess and surplus lines of business.
Healthcare Professional Liability Claims-Made
($ in thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
$ 364,996 $ 354,787 $ 338,170 $ 312,813 $ 291,553 $ 279,713 $ 270,484 $ 258,466 $ 257,714 $
254,974
$ (1,161)
— $ 348,916 $ 344,808 $ 331,884 $ 305,540 $ 289,400 $ 278,258 $ 264,777 $ 254,329
253,163
$ (1,377)
—
—
—
—
—
—
—
—
— $ 341,289 $ 324,418 $ 319,613 $ 306,956 $ 291,075 $ 279,589 $ 271,110
266,629
$ (1,040)
—
—
—
—
—
—
—
— $ 315,346 $ 304,209 $ 296,550 $ 287,140 $ 272,364 $ 258,251
248,594
$ (4,737)
—
—
—
—
—
—
— $ 290,020 $ 289,397 $ 280,043 $ 267,442 $ 256,968
244,607
$ (4,466)
—
—
—
—
—
— $ 276,492 $ 269,980 $ 271,138 $ 270,814
256,785
$ (13,965)
—
—
—
—
— $ 271,765 $ 274,643 $ 287,551
293,515
$ (6,524)
—
—
—
— $ 283,746 $ 295,883
331,304
$ (3,097)
—
—
— $ 320,772
377,908
$ 33,282
—
—
377,242
$ 225,384
3,845
3,530
3,699
3,767
3,315
3,267
3,534
3,869
3,980
3,134
$ 2,904,721
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
$ 15,464 $ 69,551 $ 137,712 $ 180,432 $ 209,777 $ 221,693 $ 236,171 $ 240,945 $ 243,675 $
246,974
— $ 14,417 $ 71,208 $ 133,004 $ 177,089 $ 198,112 $ 214,502 $ 224,982 $ 233,103
—
—
—
—
—
—
—
—
— $ 15,382 $ 73,571 $ 145,488 $ 190,997 $ 215,220 $ 231,652 $ 244,512
—
—
—
—
—
—
—
— $ 16,938 $ 69,657 $ 127,496 $ 171,681 $ 197,265 $ 213,879
—
—
—
—
—
—
— $ 16,764 $ 59,485 $ 116,791 $ 154,236 $ 186,239
—
—
—
—
—
— $
9,172 $ 55,731 $ 111,741 $ 161,896
—
—
—
—
— $
9,027 $ 51,869 $ 109,756
—
—
—
— $ 16,309 $ 63,171
—
—
— $ 14,051
—
—
(In thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
237,605
250,806
220,402
200,392
195,047
164,811
134,787
79,291
17,838
1,747,953
9,771
$ 1,166,539
All outstanding liabilities before 2010, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
155
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Healthcare Professional Liability Occurrence
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2019
($ in thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year Ended December 31,
Unaudited
$ 41,721 $ 43,238 $ 43,195 $ 42,233 $ 37,920 $ 35,831 $ 33,361 $ 29,338 $ 26,501 $
24,898
— $ 45,882 $ 44,956 $ 41,453 $ 39,917 $ 37,150 $ 35,004 $ 32,343 $ 29,784
— $ 45,703 $ 46,513 $ 44,848 $ 40,692 $ 34,774 $ 32,691 $ 29,857
IBNR*
$
$
$
$
$
$
$
277
21
(778)
(658)
(352)
(170)
(349)
27,533
25,705
24,857
22,243
36,468
25,019
Cumulative
Number of
Reported
Claims
291
342
398
358
346
359
357
360
294
179
— $ 32,746 $ 36,602 $ 35,624 $ 34,393 $ 30,906 $ 26,919
— $ 30,420 $ 29,918 $ 32,143 $ 29,869 $ 25,885
— $ 35,648 $ 35,347 $ 37,346 $ 40,960
— $ 29,609 $ 28,790 $ 27,240
—
—
—
— $ 24,571 $ 23,760
21,148
$ 10,738
—
—
— $ 38,420
41,555
$ 25,403
—
—
35,420
$ 31,148
$
284,846
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
285 $
1,881 $
5,647 $
9,120 $ 15,147 $ 21,837 $ 22,804 $ 23,313 $ 23,832 $
— $
291 $
2,803 $
8,059 $ 16,544 $ 19,197 $ 21,416 $ 23,194 $ 24,539
Unaudited
— $
363 $
2,430 $
7,705 $ 12,212 $ 19,275 $ 21,435 $ 23,095
— $
369 $
3,170 $
7,826 $ 14,753 $ 16,787 $ 18,949
— $
394 $
2,260 $
7,460 $ 10,519 $ 14,604
— $
(350) $
786 $
4,854 $ 11,626
— $
(182) $
(195) $
2,883
23,981
24,933
23,600
21,241
17,024
15,462
10,576
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
(In thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
—
—
—
— $ (6,809) $ (5,858)
(2,765)
—
—
— $
—
65
—
2,098
439
136,589
6,998
$
155,255
All outstanding liabilities before 2010, 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
5.1%
18.7% 23.5% 17.5% 10.9%
6.0%
Healthcare Professional Liability Occurrence
(2.6%)
6.2%
16.9% 21.9% 16.4% 12.6%
4.3%
6.5%
2.5%
3.0%
1.4%
1.8%
1.3%
0.6%
156
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year Ended December 31,
Unaudited
$ 26,077 $ 27,063 $ 25,175 $ 23,307 $ 19,315 $ 17,439 $ 16,047 $ 16,878 $ 18,611 $
17,865
— $ 17,249 $ 20,930 $ 19,166 $ 15,836 $ 13,794 $ 12,487 $ 12,358 $
8,202
— $ 11,162 $
9,989 $
8,906 $
7,441 $
5,824 $
4,797 $
5,051
— $
9,807 $
9,955 $
9,536 $
7,226 $
4,697 $
3,566
IBNR*
$
$
$
$
93
262
65
318
7,944
3,889
3,504
—
—
—
—
—
—
— $
9,989 $ 10,306 $
9,012 $
8,984 $
7,679
6,194
$ 1,058
—
—
—
—
—
— $
9,376 $
8,757 $
7,193 $
5,929
5,081
$ 1,585
—
—
—
—
— $
9,200 $
8,467 $
7,413
6,422
$ 1,829
—
—
—
— $ 11,049 $ 10,143
8,306
$ 5,782
—
—
— $ 10,141
8,108
$ 7,280
—
—
10,072
$ 8,923
$
77,385
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Cumulative
Number of
Reported
Claims
497
522
221
218
272
155
182
95
217
310
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Unaudited
$
485 $
3,557 $
8,491 $ 12,283 $ 11,725 $ 12,146 $ 12,253 $ 15,366 $ 17,660 $
17,661
— $
118 $
2,034 $
3,846 $
5,062 $
7,376 $
7,240 $
7,799 $
7,664
—
—
—
—
—
—
—
—
— $
568 $
1,520 $
2,805 $
3,247 $
3,366 $
3,676 $
3,800
—
—
—
—
—
—
—
— $
102 $
1,029 $
1,967 $
2,599 $
3,092 $
3,102
—
—
—
—
—
—
— $
388 $
1,527 $
2,564 $
3,046 $
3,724
—
—
—
—
—
— $
—
—
—
—
25 $
— $
—
—
—
440 $
1,625 $
2,097
53 $
1,690 $
2,365
— $
56 $
1,681
—
—
— $
—
6
—
7,665
3,817
3,102
3,776
2,567
2,959
2,017
191
584
44,339
789
All outstanding liabilities before 2010, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
33,835
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
Unaudited
7
8
9
10
Medical Technology Liability
3.6% 18.5% 20.6% 13.2% 10.6%
2.0%
2.7%
5.4%
6.4%
—%
157
($ in thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
(In thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year Ended December 31,
$ 55,852 $ 55,852 $ 55,852 $ 54,837 $ 54,779 $ 55,200 $ 54,600 $ 54,600 $ 54,600 $
— $ 65,665 $ 65,783 $ 71,521 $ 72,280 $ 72,420 $ 72,495 $ 72,495 $ 72,495
Unaudited
— $ 80,285 $ 76,551 $ 75,848 $ 76,357 $ 75,836 $ 75,576 $ 75,076
— $ 86,973 $ 85,935 $ 86,928 $ 88,010 $ 87,260 $ 87,260
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 93,019 $ 93,529 $ 93,029 $ 93,029 $ 93,029
— $ 100,101 $ 100,454 $ 98,454 $ 97,654
—
—
—
—
— $ 101,348 $ 97,348 $ 92,148
— $ 99,874 $ 99,874
—
—
—
—
—
— $ 118,095
118,095
—
—
119,752
$ 39,118
$
903,584
54,400
72,445
75,076
89,760
93,029
96,354
84,799
99,874
IBNR*
$
$
$
$
$
$
$
$
$
(98)
1,658
790
1,420
3,395
5,871
4,311
6,274
8,393
Cumulative
Number of
Reported
Claims
12,913
15,244
16,204
16,429
16,210
16,549
15,977
16,077
17,991
17,082
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$ 20,086 $ 39,098 $ 46,762 $ 51,117 $ 52,530 $ 53,443 $ 53,734 $ 53,974 $ 54,014 $
— $ 21,993 $ 50,900 $ 62,307 $ 67,945 $ 70,146 $ 70,934 $ 71,662 $ 71,856
Unaudited
—
—
—
—
—
—
—
—
— $ 27,448 $ 56,122 $ 65,908 $ 70,558 $ 72,766 $ 73,662 $ 73,676
—
—
—
—
—
—
—
— $ 30,554 $ 63,825 $ 76,813 $ 82,369 $ 85,689 $ 86,783
—
—
—
—
—
—
— $ 30,368 $ 65,922 $ 77,631 $ 85,022 $ 87,314
—
—
—
—
—
— $ 32,078 $ 65,070 $ 78,947 $ 83,483
—
—
—
—
— $ 28,377 $ 58,192 $ 69,237
—
—
—
— $ 31,586 $ 70,333
—
—
— $ 41,619
—
—
54,207
71,927
73,768
87,466
87,998
86,528
74,886
82,289
86,063
40,994
746,126
3,347
All outstanding liabilities before 2010, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
160,805
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
33.8% 37.1% 13.7%
6.8%
3.0%
1.2%
0.6%
0.3%
0.1%
0.4%
158
($ in thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
(In thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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, 2019
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Year Ended December 31,
$ 19,767 $ 18,265 $ 17,715 $ 17,825 $ 17,736 $ 17,541 $ 17,320 $ 17,278 $ 17,224 $
— $ 18,790 $ 19,360 $ 19,629 $ 19,282 $ 18,644 $ 18,725 $ 18,666 $ 18,606
Unaudited
— $ 22,940 $ 21,513 $ 21,048 $ 20,028 $ 19,972 $ 19,864 $ 19,799
— $ 23,809 $ 25,310 $ 26,758 $ 26,619 $ 26,260 $ 26,033
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 28,248 $ 28,423 $ 29,000 $ 28,373 $ 28,281
— $ 36,423 $ 32,519 $ 28,746 $ 27,548
—
—
—
—
— $ 37,601 $ 34,055 $ 30,998
—
—
—
— $ 42,725 $ 38,594
— $ 43,654
—
—
—
—
48,505
$ 20,653
$
289,403
IBNR*
$
$
$
$
$
$
$
$
$
170
339
388
498
664
819
1,092
2,141
6,623
17,119
18,522
19,727
25,938
27,919
26,720
29,424
34,246
41,283
Cumulative
Number of
Reported
Claims
2,914
3,154
3,454
3,723
4,433
4,949
5,327
5,703
6,337
5,965
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
$
6,503 $ 12,904 $ 15,087 $ 16,214 $ 16,757 $ 16,842 $ 16,810 $ 16,850 $ 16,904 $
— $
5,940 $ 14,045 $ 17,197 $ 17,869 $ 18,054 $ 18,177 $ 18,176 $ 18,185
Unaudited
—
—
—
—
—
—
—
—
— $
7,808 $ 14,740 $ 17,728 $ 18,474 $ 19,208 $ 19,402 $ 19,328
—
—
—
—
—
—
—
— $
8,131 $ 19,054 $ 24,268 $ 25,209 $ 25,366 $ 25,489
—
—
—
—
—
—
— $
9,933 $ 21,880 $ 26,173 $ 26,810 $ 26,959
—
—
—
—
—
— $ 11,257 $ 21,706 $ 23,977 $ 24,781
—
—
—
—
— $ 10,980 $ 23,003 $ 26,285
—
—
—
— $ 12,404 $ 24,791
—
—
— $ 12,517
—
—
16,904
18,185
19,311
25,440
27,083
25,033
27,162
28,853
27,501
15,100
All outstanding liabilities before 2010, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
230,572
95
$
58,926
($ in thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Total
(In thousands)
Accident Year
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
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
35.4% 39.3% 14.0%
3.7%
1.7%
0.6% (0.2%)
0.1%
0.2%
—%
159
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Syndicate 1729 Reserve
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, 2019
2014
2015
2016
2017
2018
2019
Year Ended December 31,
$
6,110 $
5,812 $
5,610 $
5,547 $
5,472 $
Unaudited
— $
14,810 $
14,510 $
14,398 $
—
—
—
—
— $
19,535 $
19,669 $
—
—
—
— $
22,069 $
—
—
— $
—
14,232
19,552
21,824
18,688
—
$
Cumulative
Number of
Reported
Claims(2)
IBNR(1)
$
$
$
$
$
$
5,432
14,181
19,344
21,207
18,120
15,990
94,274
733
1,432
3,961
5,242
10,908
14,053
nm
nm
nm
nm
nm
nm
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
2019
Total
(In thousands)
Accident Year
2014
2015
2016
2017
2018
2019
Total
(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
2014
2015
2016
2017
2018
2019
Year Ended December 31,
$
20 $
— $
—
—
—
—
Unaudited
474 $
724 $
— $
—
—
—
4,092 $
6,307 $
2,495 $
— $
—
—
4,214 $
4,320 $
10,313 $
8,441 $
2,611 $
— $
—
10,947
12,869
8,301
1,852
—
4,580
11,654
13,596
12,871
4,905
1,124
48,730
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
45,544
160
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Syndicate 1729 Property Insurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2019
2014
2015
2016
2017
2018
2019
Year Ended December 31,
$
890 $
— $
1,089 $
5,519 $
Unaudited
888 $
864 $
866 $
5,917 $
6,194 $
—
—
—
—
— $
11,896 $
12,984 $
—
—
—
— $
15,018 $
—
—
— $
—
Cumulative
Number of
Reported
Claims
IBNR*
(43)
753
(27)
634
1,506
5,887
68
537
1,454
2,640
3,344
3,053
6,159
12,823
17,634
20,636
—
$
$
$
$
$
$
$
831
5,886
12,475
19,976
21,888
18,010
79,066
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
2019
Total
(In thousands)
Accident Year
2014
2015
2016
2017
2018
2019
Total
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
2014
2015
2016
2017
2018
2019
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
—
860
5,018
12,400
19,404
17,248
5,575
60,505
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
18,561
161
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Syndicate 1729 Property Reinsurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2019
2014
2015
2016
2017
2018
2019
Year Ended December 31,
$
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
—
$
$
$
$
$
$
$
1,120
2,377
2,832
6,868
6,398
10,977
30,572
—
—
438
(1,935)
5,215
3,994
nm
nm
nm
nm
nm
nm
(1) Includes expected development on reported claims
(2) The abbreviation "nm" indicates that the information is not meaningful
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
2014
2015
2016
2017
2018
2019
Year Ended December 31,
Unaudited
$
79 $
— $
917 $
984 $
1,313 $
1,804 $
—
—
—
—
— $
—
—
—
613 $
— $
—
—
984 $
1,996 $
1,667 $
4,147 $
— $
—
1,125 $
2,234
2,136
7,300
547
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
1,120
2,267
2,192
8,947
1,644
4,974
21,144
—
9,428
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
2019
Total
(In thousands)
Accident Year
2014
2015
2016
2017
2018
2019
Total
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
Unaudited
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%
3.2%
0.2%
0.4%
1.1%
0.1%
0.2%
1.0%
0.1%
0.1%
0.4%
0.1%
—%
—%
—%
—%
—%
—%
—%
162
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Below is a reconciliation of the claims development information to the Consolidated Balance Sheet:
(In thousands)
December 31, 2019
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
Liabilities for losses and loss adjustment expenses, net of reinsurance
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 transfers (1)
Premium deficiency reserve (2)
Other
$
1,166,539
155,255
33,835
160,805
58,926
45,544
18,561
9,428
102,997
1,751,890
184,645
45,827
31,771
62,314
35,200
1,724
10,754
12,826
5,647
390,708
74,200
103,600
16,983
9,200
(55)
203,928
Gross liability for losses and loss adjustment expenses
$
2,346,526
(1) Represents the reserve for retroactive coverages, net of any applicable deferred gains, related to loss portfolio transfers
during entered into during 2019 and 2018 (see Note 4).
(2) Represents the estimated premium deficiency associated with the unearned premium of a large national healthcare
account in the Company's Specialty P&C segment (see Note 7).
163
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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.
As a member of Lloyd's, ProAssurance has obligations to Syndicate 1729 and Syndicate 6131 including a Syndicate
Credit Agreement and FAL requirements. The Syndicate Credit Agreement is an unconditional revolving credit agreement to
the Premium Trust Fund of Syndicate 1729 for the purpose of providing working capital with maximum permitted borrowings
of £30.0 million (approximately $39.8 million at December 31, 2019). In January 2019, the Syndicate Credit Agreement was
amended to extend the current maturity from December 31, 2019 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. 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, 2020, subject to
extension through the auto-renewal feature. As of December 31, 2019, there were no outstanding borrowings under the
Syndicate Credit Agreement. ProAssurance also provides FAL to support underwriting by Syndicate 1729 and Syndicate 6131
which is comprised of investment securities and cash and cash equivalents deposited with Lloyd's with a total fair value of
approximately $137.1 million at December 31, 2019. See further discussion on the Syndicate Credit Agreement and FAL in
Note 3.
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. As of December 31, 2019, ProAssurance had total
funding commitments related to non-public investment entities as well as the short-term loan commitment of approximately
$240.3 million 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, $0.8 million is related to qualified affordable housing project tax credit investments and is
expected to be paid as follows: $0.2 million in 2020, $0.4 million in 2021 and 2022 combined, $0.1 million in 2023 and 2024
combined and $0.1 million thereafter.
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 expenses associated with
this agreement of $4.9 million and $1.0 million for the years ended December 31, 2019 and 2018, respectively. As of
December 31, 2019, the remaining commitment under this agreement was approximately $3.6 million.
164
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
10. Leases
ProAssurance is involved in a number of operating leases primarily for office facilities. Office facility leases have
remaining lease terms ranging from one year to thirteen years; some of which include options to extend the leases for up to ten
years, and some of which include an option to terminate the lease within one year. ProAssurance subleases certain office
facilities to third parties and classifies these leases as operating leases.
The following table provides a summary of the components of lease expense as well as the reporting location in the
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2019 and 2018.
(In thousands)
Operating lease expense (1)
Sublease income (2)
Net lease expense
Location in the Consolidated
Statements of Income and
Comprehensive Income
Operating expense
Other income
Year Ended December 31
2019
2018
$
$
4,485 $
(152)
4,333 $
5,030
(148)
4,882
(1) Includes short-term lease costs and variable lease costs, if applicable. For the year ended December 31, 2019, no short-
term lease costs were recognized and variable lease costs were nominal in amount. For the year ended December 31,
2018, short-term lease costs and variable lease costs were each nominal in amount.
(2) Sublease income excludes rental income from owned properties of $2.5 million and $2.4 million during the years ended
December 31, 2019 and 2018, respectively, which is included in other income. See “Item 2. Properties” for a listing of
currently owned properties.
The following table provides supplemental lease information for operating leases on the Consolidated Balance Sheet as of
December 31, 2019.
($ in thousands)
Operating lease ROU assets
Operating lease liabilities
Weighted-average remaining lease term
Weighted-average discount rate
December 31, 2019
21,074
$
$
22,051
8.74 years
3.08%
The following table provides supplemental lease information for the Consolidated Statements of Cash Flows for the years
ended December 31, 2019 and 2018.
(In thousands)
Cash paid for amounts included in the measurement
of lease liabilities:
Year Ended December 31
2019
2018
Operating cash flows from operating leases
$
976 $
297
165
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
The following table is a schedule of remaining future minimum lease payments for operating leases that had an initial or
remaining non-cancellable lease term in excess of one year as of December 31, 2019. Operating lease payments exclude $1.5
million of total future minimum lease payments for a lease signed but not yet commenced as of December 31, 2019. This lease
will commence in the first quarter of 2020 with a lease term of approximately eleven years.
(In thousands)
2020
2021
2022
2023
2024
Thereafter
Total future minimum lease payments
Less: Imputed interest
Total operating lease liabilities
$
$
4,146
3,941
3,054
2,350
1,763
9,959
25,213
3,162
22,051
11. Debt
ProAssurance’s outstanding debt consisted of the following:
(In thousands)
Senior Notes due 2023, unsecured, interest at 5.3% annually
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%
(3.21% and 4.10%, respectively) determined on a quarterly basis.
Total principal
Less unamortized debt issuance costs
Debt less unamortized debt issuance costs
Senior Notes due 2023 (the Senior Notes)
December 31,
2019
250,000
$
December 31,
2018
250,000
$
37,617
287,617
1,796
39,064
289,064
1,307
$
285,821
$
287,757
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.
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
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 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 12.
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.
166
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
At December 31, 2019, 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
$
2020
2021
2022
2023
2024
Thereafter
Total principal payments $
1,503
1,559
1,617
1,677
1,740
29,521
37,617
Revolving Credit Agreement
ProAssurance has a Revolving Credit Agreement with seven participating lenders. During November 2019, ProAssurance
executed an amendment to the Revolving Credit Agreement which extended the expiration from June 2020 to November 2024
and increased the permitted borrowings from $200 million to $250 million. The Revolving Credit Agreement continues to have
a $50 million accordion feature which, if successfully subscribed, would expand the permitted borrowings to a maximum of
$300 million. The amended Revolving Credit Agreement permits ProAssurance to borrow, repay and reborrow from the lenders
during the term of the Revolving Credit Agreement. 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 0.15% to 0.30% 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 1.88%, 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 $1.0 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.
Covenant Compliance
ProAssurance is currently in compliance with all covenants.
12. 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, 2019, 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
167
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
provided in Note 11. Under the terms of the interest rate cap agreement, ProAssurance paid a premium of $2 million for the
right to receive cash payments based upon a notional amount of $35 million if and when the three-month LIBOR rises above
2.35%. The Company's variable-rate Mortgage Loans bear an interest rate of three-month LIBOR plus 1.325%. Therefore, this
derivative instrument is effectively ensuring the interest rate related to the Mortgage Loans is capped at a maximum of 3.675%
until expiration of the interest rate cap agreement in October 2027. During the year ended December 31, 2019, ProAssurance
received a nominal amount of cash payments associated with this agreement, which were recorded as a reduction to interest
expense. ProAssurance has designated the interest rate cap as an economic hedge (non-hedging instrument) of interest rate
exposure and any change in fair value of the derivative is immediately recognized in earnings during the period of change.
The following table provides a summary of the volume and fair value position of the interest rate cap as well as the
reporting location in the Consolidated Balance Sheets as of December 31, 2019 and 2018.
($ in thousands)
December 31, 2019
December 31, 2018
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 $
760
1
$
35,000 $
1,884
(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, 2019, 2018
and 2017.
(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
2019
2018
2017
$
(1,124) $
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, 2019, the counterparty had an investment grade rating of BBB- and has performed in accordance with their
contractual obligations.
13. Shareholders’ Equity
At December 31, 2019 and 2018, 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,
2019, 2018 and 2017:
(In thousands)
2019
2018
2017
Issued and outstanding shares - January 1
Shares issued due to vesting of share-based compensation awards
Other shares issued for compensation and shares reissued to stock
purchase plan*
Issued and outstanding shares - December 31
53,637
132
23
53,792
53,457
135
45
53,637
53,251
132
74
53,457
* Shares issued were valued at fair value (the market price of a ProAssurance common share on the date of issue).
168
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
As of December 31, 2019, approximately 1.8 million of ProAssurance's authorized common shares were reserved by the
Board for award or issuance under the incentive compensation plans described in Note 14 and an additional 0.5 million of
authorized common shares were reserved for the issuance of currently outstanding restricted share and performance share unit
awards.
ProAssurance declared cash dividends during 2019, 2018 and 2017 as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter*
Cash Dividends Declared, per Share
2019
2018
2017
$
$
$
$
0.31
0.31
0.31
0.31
$
$
$
$
0.31
0.31
0.31
0.81
$
$
$
$
0.31
0.31
0.31
5.00
* Includes special dividends of $0.50 per share in 2018 and $4.69 per share 2017.
Quarterly dividends were paid in the month following the quarter in which they were declared. Dividends declared during
2019, 2018 and 2017 totaled $66.7 million, $94.3 million and $316.9 million, respectively.
ProAssurance's ability to pay dividends to its shareholders is limited by its holding company structure, to the extent of the
net assets held by its insurance subsidiaries, as discussed in Note 19. 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, 2019, total equity of $467.6 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, 2019, 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, 2019, 2018 and 2017, 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, 2019 and
2018, OCI also 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.
At December 31, 2019 and 2018, 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 $0.3
million and $0.1 million, respectively, net of tax. At December 31, 2019 and 2018, 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. Except for an immaterial amount
of unrealized gains and losses on available-for-sale securities held at the Company's U.K. subsidiary at December 31, 2019 and
2018, and an immaterial amount of unrealized gains and losses on available-for-sale securities held at the Company's Cayman
Islands subsidiaries at December 31, 2018, tax effects of amounts in AOCI at December 31, 2019 and 2018 were computed
using the enacted U.S. federal corporate tax rate of 21%.
169
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Amounts reclassified from AOCI to net income and the amounts of deferred tax expense (benefit) included in OCI were
as follows:
(In thousands)
2019
2018
2017
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
Total gains (losses) reclassified, before-tax effect
Tax effect*
Net reclassification adjustments
Deferred tax expense (benefit) included in OCI
$
2,500
$
274
$
2,512
—
2,500
(525)
1,975
14,150
$
$
$
$
(621)
(347)
73
(274) $
(3)
2,509
(878)
1,631
(9,573) $
(4,676)
* Tax effects were computed using a 21% rate for the years ended December 31, 2019 and 2018 and a 35% rate for the year ended
December 31, 2017.
14. Share-Based Payments
Share-based compensation costs are primarily classified as a component of operating expense.
During 2019, 2018 and 2017, ProAssurance provided share-based compensation to employees utilizing three types of
awards: restricted share units, performance share units and purchase match units. The restricted share and performance share
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, 2019
($ in millions, except remaining recognition period)
2019
2018
2017
Amount
Total share-based compensation expense
Tax benefit recognized
$
$
3.5
0.7
$
$
5.3
1.1
$
$
10.6
3.7
$
5.6
Weighted Average
Remaining
Recognition Period
2.5
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, 2019,
the majority of share-based compensation expense related to restricted share units. Restricted share and performance share units
vest in their entirety generally at the end of a three-year period, except for certain restricted share units granted in 2019 which
will vest at the end of a five-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. All non-vested
purchase match units at December 31, 2018 were fully vested in the fourth quarter of 2019; previously, units vested 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 of ProAssurance common stock is issued per vested unit. For performance share units, the
number of shares of ProAssurance common stock 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 of ProAssurance
common stock. Liability classified awards, which are nominal in amount, are settled in cash at the end of the vesting period.
170
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Restricted Share Units
Activity for restricted share units during 2019, 2018 and 2017 is summarized below. Grant date fair values are based on
the market value of a share of ProAssurance common stock on the date of grant less the estimated net present value of expected
dividends during the vesting period.
2019
2018
2017
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
Weighted
Average
Grant Date
Fair Value
49.16
36.96
45.09
46.06
43.99
Units
267,323
164,196
$
$
(3,832) $
(107,062) $
320,625
$
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
The aggregate grant date fair value of restricted share units vested and released in 2019, 2018 and 2017 totaled $4.9
million, $3.6 million and $2.2 million, respectively. The aggregate intrinsic value of restricted share units vested and released in
2019, 2018 and 2017 (including units paid in cash to cover tax withholdings) totaled $4.6 million, $4.1 million and $3.1
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 2019, 2018 and 2017 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 share of ProAssurance common stock on the date of grant less the estimated net present value of
expected dividends during the vesting period.
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
2019
2018
2017
Weighted
Average
Grant Date
Fair Value
49.95
40.18
—
45.59
50.10
Base Units
135,202
25,168
$
$
— $
(60,000) $
$
100,370
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
The aggregate grant date fair value of performance share units (base level) vested and released in 2019, 2018 and 2017
totaled $2.7 million, $4.5 million and $6.1 million, respectively. The aggregate intrinsic value of performance share units (base
level) vested and released in 2019, 2018 and 2017 (including units paid in cash to cover tax withholdings) totaled $2.6 million,
$5.0 million and $8.7 million, respectively. The weighted average level at which the vested units were issued was 95%, 125%
and 119% during 2019, 2018 and 2017, respectively, based on performance levels achieved.
171
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Purchase Match Units
The ProAssurance Corporation 2011 Employee Stock Ownership Plan provided a purchase match unit for each share of
ProAssurance common stock 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 the existing non-vested purchase match units were fully vested in the fourth quarter of 2019. Purchase match
unit activity during 2019, 2018 and 2017 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 expected dividends during the vesting
period.
2019
2018
2017
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
Beginning non-vested balance
44,682
$
51.05
70,292
$
49.40
Granted
Forfeited
Vested and released
Ending non-vested balance
— $
(1,400) $
(43,282) $
— $
—
51.47
51.03
—
— $
(1,594) $
(24,016) $
$
44,682
—
50.19
46.28
51.05
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
The aggregate grant date fair value of purchase match units vested and released in 2019, 2018 and 2017 totaled $2.2
million, $1.1 million and $1.0 million, respectively. The aggregate intrinsic value of purchase match share units vested and
released in 2019, 2018 and 2017 (including units paid in cash to cover tax withholdings) totaled $1.7 million, $1.1 million and
$1.4 million, respectively.
15. 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 $309.0
million at December 31, 2019 and $285.8 million at December 31, 2018.
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, 2019, ProAssurance’s maximum loss exposure relative to these investments was limited to the carrying value
of ProAssurance’s investment in the VIE.
172
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
16. 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)
2019
2018
2017
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
53,740
53,598
53,393
75
10
16
70
63
18
85
110
23
Weighted average number of common shares
outstanding, diluted
53,841
53,749
53,611
Effect of dilutive shares on earnings per share
$
— $
— $
(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. There were no antidilutive common share equivalents for the
year ended December 31, 2019. 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.
173
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
17. 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 its CODM to
determine whether any changes have occurred that would impact its segment reporting structure. The Company operates in five
segments that are organized around the nature of the products and services provided: Specialty P&C, Workers' Compensation
Insurance, Segregated Portfolio Cell Reinsurance, Lloyd's Syndicates and Corporate. A description of each of ProAssurance's
five operating and reportable segments follows.
Specialty P&C includes 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. In addition, the Specialty P&C segment also offers
custom alternative risk solutions including loss portfolio transfers and captive cell programs for healthcare professional liability
insureds. For the alternative market captive cell programs, the Specialty P&C segment cedes either all or a portion of the
premium to certain SPCs in the Company's Segregated Portfolio Cell Reinsurance segment.
Workers' Compensation Insurance includes workers' compensation products provided to employers with 1,000 or fewer
employees. The segment's products include guaranteed cost policies, 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
program premiums are 100% ceded to either SPCs in the Company's Segregated Portfolio Cell Reinsurance segment or, to a
limited extent, to a captive insurer unaffiliated with ProAssurance.
Segregated Portfolio Cell Reinsurance reflects the net operating results (underwriting profit or loss, plus investment
results, net of U.S. federal income taxes) of SPCs at Inova Re and Eastern Re, the Company's Cayman Islands SPC operations.
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
attributable to external cell participants are reflected as an SPC dividend expense (income) 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 attributable to external cell participants are reflected in the SPC dividend expense
(income). The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of
the two from the Company's Workers' Compensation Insurance and Specialty P&C segments. In addition, during 2019 one SPC
at Eastern Re assumed an errors and omissions liability policy from a captive insurer unaffiliated with ProAssurance; the
Company does not participate in the SPC that assumed this policy; therefore, the operating results of this policy are the
obligation of the external cell participants and are reflected as an offset in the SPC dividend (expense) income and have no
effect on the Segregated Portfolio Cell Reinsurance segment net operating results.
Lloyd's Syndicates includes operating results from ProAssurance's participation in Lloyd's of London Syndicate 1729 and
Syndicate 6131, which is an SPA that underwrites on a quota share basis with Syndicate 1729. The results of this segment are
normally reported on a quarter lag, 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. For the
2019 underwriting year, ProAssurance slightly decreased its participation in the operating results of Syndicate 1729 from 62%
to 61%; however, due to the quarter lag these changes were not reflected in the Lloyd's Syndicates segment results until the
second quarter of 2019. Furthermore, ProAssurance's 100% participation in Syndicate 6131 was not reflected in the Lloyd's
Syndicates segment results until the second quarter of 2018 as Syndicate 6131 began writing business effective January 1,
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 Company's 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
174
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
on operating profit or loss, which includes investment results of investment assets solely allocated to SPC operations, net of
U.S. federal income taxes. Performance of the Lloyd's Syndicates segment is evaluated based on operating profit or loss, which
includes 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, 2019
Specialty
P&C
Workers'
Compensation
Insurance
Segregated
Portfolio Cell
Reinsurance
Lloyd's
Syndicates
Corporate
Inter-
segment
Eliminations
Consolidated
$
499,058
$
189,240
$
78,563
$
80,671
$
— $
— $
847,532
—
—
—
—
—
—
5,796
2,399
1,578
—
4,020
559
4,551
87,140
—
768
(573)
(10,061)
55,086
3,478
—
—
—
—
(2,439)
93,269
(10,061)
59,874
9,220
—
(753,915)
Net losses and loss adjustment expenses
(532,485)
(121,649)
(52,412)
(47,369)
Underwriting, policy acquisition and
operating expenses(1)(2)
Segregated portfolio cells dividend (expense)
income
Interest expense
Income tax benefit (expense)
(120,310)
(57,520)
(24,260)
(34,711)
(19,146)
2,439
(253,508)
—
—
—
—
—
—
(4,579)
—
—
—
—
—
—
(16,636)
29,808
—
—
—
(4,579)
(16,636)
29,808
Segment operating results
$ (147,941)
$
12,470
$
3,469
$
3,337
$
129,669
$
— $
1,004
Significant non-cash items:
Depreciation and amortization, net of
accretion
$
6,586
$
3,825
$
(41)
$
(7)
$
8,302
$
— $
18,665
(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)(2)
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)
—
—
—
781
7,050
$
$
—
—
—
$
$
14,315
3,850
$
$
(9,122)
—
—
2,294
441
$
$
—
—
317
(12,672)
$
—
(16,163)
17,715
42,339
(8)
$
9,922
$
$
—
46
—
— $
(9,122)
(16,117)
18,032
47,057
— $
21,255
175
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
Year Ended December 31, 2017
Specialty
P&C
Workers'
Compensati
on 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(3)
Interest expense
Income tax benefit (expense)(3)
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)
—
—
—
—
—
(10,590)
—
—
—
—
568
—
(16,844)
(21,927)
$
$
57,108
$
10,596
7,922
$
3,480
$
$
4,476
$
(13,046)
$
48,130
680
$
(20)
$
16,734
—
—
—
(15,771)
(16,844)
(21,359)
— $
107,264
— $
28,796
$
$
(1) Certain fees for services provided to the SPCs at Inova Re and Eastern 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 primarily SPC rental fees and are eliminated between segments in
consolidation.
(2) Underwriting, policy acquisition and operating expenses in both the years ended December 31, 2019 and 2018 included a provision for U.S. federal income
taxes of $1.1 million and $0.4 million, respectively, for SPCs at Inova Re that have elected to be taxed as U.S. taxpayers. The portion of U.S. federal income
taxes attributable to external cell participants is reflected in SPC dividend (expense) income.
(3) 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).
176
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
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)
2019
2018
2017
Year Ended December 31
Specialty P&C Segment
Gross premiums earned:
Healthcare professional liability
$
517,977
$
518,303
$
477,561
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)
Other
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
26,766
33,957
2,096
(81,738)
499,058
203,195
84,214
(98,169)
189,240
81,765
6,059
480
(9,741)
78,563
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
101,222
(20,551)
80,671
83,307
(16,260)
67,047
69,749
(12,547)
57,202
Consolidated net premiums earned
$
847,532
$
818,853
$
738,531
(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 $0.1 million, $5.0 million and $11.8 million for years ended
December 31, 2019, 2018 and 2017, respectively.
177
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
18. 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 $7.2 million, $7.0 million and $7.8 million during
the years ended December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017. ProAssurance deferred compensation liabilities totaled $26.8 million and $21.3
million at December 31, 2019 and 2018, respectively. The liabilities included amounts due under the ProAssurance Plan and
amounts due under individual agreements with current or former employees.
19. 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, 2019, 2018 or 2017. Differences
between net income (loss) prepared in accordance with GAAP and statutory net income (loss) 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,
2019, actual statutory capital and surplus for each of ProAssurance’s insurance subsidiaries exceeded the minimum regulatory
requirements. Net income (loss) and capital and surplus of ProAssurance’s insurance subsidiaries on a statutory basis are shown
in the following table.
(In millions)
Statutory Net Income (Loss)
Statutory Capital and Surplus
2019
($22)
2018
$135
2017
$139
2019
$878
2018
$1,041
At December 31, 2019, $1.2 billion of ProAssurance's consolidated net assets were held at its domestic insurance
subsidiaries, of which approximately $88 million are permitted to be paid as dividends over the course of 2020 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.
178
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2019
20. Quarterly Results of Operations (unaudited)
The following is a summary of unaudited quarterly results of operations for 2019 and 2018:
(In thousands, except per share data)
Net premiums earned
Net losses and loss adjustment expenses:
Current year
Unfavorable (favorable) development of reserves
established in prior years, net
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
(In thousands, except per share data)
Net premiums earned
Net losses and loss adjustment expenses:
Current year
Unfavorable (favorable) development of reserves
established in prior years, net
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
1st
208,149
170,032
$
$
(10,277) $
$
31,650
0.59
0.59
1st
187,159
152,572
$
$
$
$
(22,786) $
$
11,856
0.22
0.22
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2019*
2nd
209,149
184,435
$
$
(15,995) $
$
11,536
0.21
0.21
$
$
2018*
2nd
223,591
184,543
$
$
(22,815) $
$
28,423
0.53
0.53
$
$
3rd
215,788
177,555
$
$
(15,941) $
$
17,193
0.32
0.32
3rd
206,070
169,154
$
$
$
$
(21,549) $
$
31,228
0.58
0.58
$
$
4th
214,446
233,680
30,428
(59,375)
(1.10)
(1.10)
4th
202,033
179,056
(24,967)
(24,450)
(0.46)
(0.46)
*Due to rounding, the sum of quarterly amounts may not equal the total amount for the respective year-to-date periods
21. Subsequent Events
On February 20, 2020, ProAssurance entered into a definitive agreement to acquire NORCAL Group (NORCAL), an
underwriter of medical professional liability insurance, after the demutualization of NORCAL Mutual Insurance Company
(NORCAL Mutual), NORCAL's ultimate controlling party. ProAssurance will pay base consideration of $450 million to be
funded with cash and debt, with contingent consideration of up to $150 million should NORCAL reserves as of the acquisition
date develop favorably to estimates made by ProAssurance. The demutualization and the definitive agreement are mutually
contingent, and are subject to customary conditions, including approval by NORCAL Mutual policyholders and appropriate
state and federal regulators. The companies are targeting to close the transaction by the end of 2020.
179
ProAssurance Corporation and Subsidiaries
Schedule I -- Summary of Investments -- Other than Investments in Related Parties
(In thousands)
Type of Investment
Fixed maturities
Bonds:
December 31, 2019
Recorded
Cost
Basis
Fair
Value
Amount Which is
Presented
in the
Balance Sheet
U.S. Government or government agencies and authorities
$
138,708
$
140,336
$
States, municipalities and political subdivisions
Foreign governments
Public utilities
All other corporate bonds
Asset-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
287,658
39,208
75,294
1,227,444
519,764
2,288,076
3,567
35,548
188,758
227,873
343,334
339,899
296,093
40,124
77,342
1,256,376
525,798
2,336,069
4,407
40,294
205,851
250,552
463,881
339,907
140,336
296,093
40,124
77,342
1,256,376
525,798
2,336,069
4,407
40,294
205,851
250,552
463,881
339,907
Total Investments
$
3,199,182
$
3,390,409
$
3,390,409
180
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
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,
2019
December 31,
2018
$
1,534,367
$
1,599,486
85,263
63,992
915
65,956
40,640
78,076
76,347
875
25,757
45,683
$
1,791,133
$
1,826,224
$
$
9,899
16,676
4,268
248,377
279,220
4,067
43,446
6,823
248,886
303,222
631
630
1,511,282
1,511,913
$
1,791,133
$
1,522,372
1,523,002
1,826,224
181
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 (loss) of consolidated subsidiaries
Income tax expense (benefit)
Income (loss) before equity in net income (loss) of consolidated
subsidiaries
Equity in net income (loss) of consolidated subsidiaries
Net income
Other comprehensive income (loss)
Comprehensive income
Year Ended December 31
2019
2018
2017
$
2,694
$
40
19
795
3,548
14,074
16,653
30,727
(27,179)
(28,455)
1,276
(272)
1,004
53,866
$
54,870
$
$
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
182
ProAssurance Corporation and Subsidiaries
Schedule II – Condensed Financial Information of Registrant
Condensed Statements of Cash Flow
(In thousands)
Net cash provided (used) by operating activities
Investing activities
Proceeds from sales or maturities of:
Fixed maturities, available for sale
Net decrease (increase) in short-term investments
Dividends from 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
Year Ended December 31
2019
2018
2017
$
20,055
$
27,981
$
67,779
27,974
12,603
52,499
—
(4,894)
30,296
—
(936)
117,542
169,822
194,035
29,395
—
(21,576)
(11,232)
—
330
360,774
295,035
11,811
99,694
1,100
(25,449)
(6,883)
(4,066)
(2,276)
368,966
Borrowings (repayments) under Revolving Credit Agreement
—
(123,000)
(77,000)
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
Basis of Presentation
344
(93,204)
(4,538)
(97,398)
40,199
25,757
1,154
(316,476)
(5,685)
(444,007)
(55,252)
81,009
65,956
$
25,757
$
12,030
(315,228)
(6,868)
(387,066)
49,679
31,330
81,009
2,053
13,699
16,676
34,897
$
$
$
$
4,966
14,777
43,446
98,292
$
$
$
$
17,193
15,892
267,292
190,709
$
$
$
$
$
The registrant-only financial statements should be read in conjunction with ProAssurance Corporation’s Consolidated
Financial Statements and Notes thereto.
At December 31, 2019 and 2018, 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.
183
ProAssurance Corporation and Subsidiaries
Schedule III – Supplementary Insurance Information
(In thousands)
2019
2018
2017
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.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
499,058 $
189,240
78,563
80,671
847,532 $
1,578 $
4,551
87,140
93,269 $
526,744 $
129,450
62,546
46,958
765,698 $
5,741 $
(7,801)
(10,134)
411
(11,783) $
382,845 $
117,848
37,034
36,593
(196)
574,124 $
56,605 $
17,144
21,717
21,392
(1,528)
115,330 $
63,705 $
40,376
2,543
13,319
19,146
(911)
138,178 $
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
184
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)
2019
2018
2017
$
$
$
$
$
495,750 $
182,233
77,639
87,103
842,725 $
494,148 $
195,350
75,547
69,869
834,914 $
466,621
173,566
68,862
54,969
764,018
55,567 $
2,346,526 $
413,086 $
54,116 $
2,119,847 $
415,211 $
50,261
2,048,381
398,884
(1) Assets are not allocated to segments because investments and assets are not managed at the segment level.
185
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
2019
2018
2017
$
$
926,035 $
(124,171)
45,668
847,532 $
5.39%
903,354 $
(126,036)
41,535
818,853 $
5.07%
821,249
(110,347)
27,629
738,531
3.74%
* All of ProAssurance’s premiums are related to property and liability coverages.
186
Exhibit
Number
EXHIBIT INDEX
Description
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 10.8(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*:
Jeffrey P. Lisenby
Edward L. Rand Jr.
10.1(a)
10.2
10.2(a)
10.2(b)
10.2(c)
10.3
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.
Employment Agreement between ProAssurance and Edward L. Rand, Jr. dated as of July 1, 2019, filed
as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ending September 30,
2019 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32, which
supersedes the Release and Severance Compensation Agreement referenced in Exhibit 10.1.*
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.*
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.*
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.* Effective July 1,
2019, W. Stancil Starnes voluntarily terminated the referenced agreement to accept his new position as
Executive Chairman.
Form of Release and Severance Compensation Agreement dated as of September 1, 2011 between
ProAssurance and Ross E. Taubman, filed as an Exhibit to ProAssurance’s Definitive Proxy Statement
(File No. 001-16533) on April 11, 2008 and incorporated herein by reference pursuant to SEC Rule
12b-32.*
10.4
Form of Indemnification Agreement between ProAssurance and each of the following named executive
officers and directors of ProAssurance*:
187
Robert E. Flowers
Howard H. Friedman
M. James Gorrie
Ziad R. Haydar
Jeffrey P. Lisenby
Frank B. O’Neil
Edward L. Rand, Jr.
Frank A. Spinosa
W. Stancil Starnes
Ross E. Taubman
Thomas A. S. Wilson, Jr.
Filed as an Exhibit to ProAssurance’s Definitive Proxy Statement (File No. 001-16533) on April 11,
2008 and incorporated herein by reference pursuant to SEC Rule 12b-32.
10.5
ProAssurance Group Employee Benefit Plan which includes the Executive Supplemental Life Insurance
Program (Article VIII), filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 001-16533) and incorporated herein by reference pursuant to SEC
Rule 12b-32.*
10.6
Amendment and Restatement of the Executive Non-Qualified Excess Plan and Trust effective January 1,
2008, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC
Rule 12b-32.*
10.7
Director Deferred Compensation Plan as amended and restated December 7, 2011, filed as an Exhibit to
ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2011 (File No.
001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*
10.7(a)
10.7(b)
10.7(c)
10.8
10.8(a)
10.8(b)
10.8(c)
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.*
Amendment No. 2 to the Amended and Restated Director Deferred Compensation Plan effective June
22, 2017, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended
December 31, 2019 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule
12b-32.*
Amendment No. 3 to the Amended and Restated Director Deferred Compensation Plan effective March
6, 2019, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended
December 31, 2019 (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.
188
10.8(d)
10.8(e)
10.8(f)
10.9
10.10
10.11
10.12
10.12(a)
10.13
10.13(a)
10.14
10.15
10.16
10.17
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.
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 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.
Amendment No. 6 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 Annual
Report on Form 10-K for the Year ended December 31, 2019 (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.*
Employment Agreement between ProAssurance and Michael Boguski dated as of May 1, 2019, filed as
an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (File
No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32, which supersedes
the Retention and Severance Compensation Agreement referenced in Exhibit 10.14.*
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 Professional Liability Group 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.
Form of Release and Severance Compensation Agreement dated as of May 13, 2019 between
ProAssurance and Dana S. Hendricks, filed as an Exhibit to ProAssurance's Annual Report on Form 10-
K for the year ended December 31, 2019 (File No. 001-16533) and incorporated herein by reference
pursuant to SEC Rule 12b-32.*
189
10.18
21.1
23.1
31.1
31.2
32.1
32.2
Form of Release and Severance Compensation Agreement dated as of May 13, 2019 between
ProAssurance and Kevin M. Shook, filed as an Exhibit to ProAssurance's Annual Report on Form 10-K
for the year ended December 31, 2019 (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
190
This page intentionally left blank
Non-GAAP Financial Measures
Appendix A
Non-GAAP operating income (loss) is a financial measure that is widely used to evaluate performance within the
insurance sector. In calculating Non-GAAP operating income (loss), 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 (loss)
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 (loss):
Year Ended December 31,
(In thousands, except per share data)
2019
2018
2017
2016
2015
Net income
$
1,004 $
47,057 $
107,264 $
151,081 $
116,197
Items excluded in the calculation of Non-GAAP
operating income (loss):
Net realized investment (gains) losses
(59,874)
43,488
(16,409)
(34,875)
41,639
Net realized gains (losses) attributable to SPCs
which no profit/loss is retained (1)
Guaranty fund assessments (recoupments)
Pre-tax effect of exclusions
Tax effect (2)
After-tax effect of exclusions
Non-GAAP operating income (loss), before tax reform
adjustments
Tax reform adjustments on our deferred tax
balances excluded in the calculation of Non-
GAAP operating income (loss):
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 (loss)
Per diluted common share:
Net income
Effect of exclusions
Non-GAAP operating income (loss) per diluted
common share
$
$
$
3,144
43
(56,687)
11,904
(44,783)
(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
(43,779)
79,527
98,500
129,844
142,629
—
—
—
—
6,541
3,497
—
—
—
—
(43,779) $
79,527 $
108,538 $
129,844 $
142,629
0.02 $
(0.83)
0.88 $
0.60
2.00 $
0.02
2.83 $
(0.40)
(0.81) $
1.48 $
2.02 $
2.43 $
2.11
0.48
2.59
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell
Reinsurance segment. SPC operating results, including any realized gain or loss, that are attributable to external cell participants
are reflected in 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 attributable to the external cell participants.
(2) The annual expected incremental tax rate for 2019 and 2018 is 21% as compared to 35% for all other years shown, 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 (loss).
(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 53,793,370 shares of
ProAssurance Corporation common
stock outstanding at March 15,
2020. On that date, we had 2,575
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, 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 then Chief
Executive Officer, submitted
the required Section 12(a) CEO
Certification to the New York
Stock Exchange on May 23, 2019.
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 20, 2020.
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
(205) 802-4799
Fax:
Annual Meeting
The 2020 Annual Meeting is scheduled
for 9:00 AM CDT on Wednesday,
May 20, 2020 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