2020
Annual
Report
® Financial Highlights
FISCAL YEARS ENDED DECEMBER 31
2020
2019
2018
2017
2016
Income Statement Highlights
(in thousands)
Gross premiums written
$ 854,422
$ 967,490
$ 957,311
$ 874,876
$ 835,014
Net premiums earned
Total revenues
$ 792,715
$ 847,532
$ 818,853
$ 738,531
$ 733,281
$ 874,940
$ 999,834
$ 886,030
$ 866,149
$ 870,214
Net losses and loss adjustment expenses
$ 661,447
$ 753,915
$ 593,210
$ 469,158
$ 443,229
Net income (loss) (1)
)
$ (175,727
$ 1,004
$ 47,057
$ 107,264
$ 151,081
Non-GAAP operating income (loss) (2)
$ (27,741
)
$ (43,779
)
$ 79,527
$ 108,538
$ 129,844
Balance Sheet Highlights
Total investments
Total assets
Reserve for losses and loss
adjustment expenses
$3,389,345
$3,390,409
$3,349,382
$3,686,528
$3,925,696
$4,654,803
$4,805,599
$4,600,726
$4,929,197
$5,065,181
$2,417,179
$2,346,526
$2,119,847
$2,048,381
$1,993,428
Debt less unamortized debt issuance costs
$ 284,713
$ 285,821
$ 287,757
$ 411,811
$ 448,202
Total liabilities
$3,305,593
$3,293,686
$3,077,724
$3,334,402
$3,266,479
(1) The 2020 net loss includes a pre-tax net underwriting loss of approximately $45.7 million associated with a tail policy issued to a large national healthcare
account and a pre-tax $10 million pandemic-related IBNR reserve, both of which were recorded in the second quarter of 2020, and a pre-tax $161.1 million
goodwill impairment charge recorded in the third quarter of 2020.
(2) A reconciliation of net income (loss) to Non-GAAP operating income (loss) is provided in Appendix A to the ProAssurance Form 10-K included with this mailing
to shareholders.
®
To My Fellow Shareholders
repositioning from five operating regions to three
for more effective and efficient management of
Much has been written about the unprecedented
the underwriting, risk management, and claims
nature of 2020, and I will not endeavor to add to it
processes. We expect this change will improve the
here. Rather, I will focus on the significant accom-
consistent application of our business model while
plishments made by the employees of ProAssurance
maintaining our local service teams. We integrated
during this extraordinary time. I am grateful for
small business and underwriting support functions
all that our Executive Leadership Team and the
into single units, each with dedicated leadership,
employees they support have done to steer us
which has resulted in better turnaround times on
toward future success. Through their efforts, we
policy submissions while continuing our individual
have improved our competitive position in one of
account underwriting philosophy, which has been
the most challenging years in the history of our
a resounding part of our success in workers’
Company. ProAssurance is a people business, and
compensation. Lastly, we realigned our previously
we have a culture that feeds off the energy that
stand-alone captive team into the existing re-
each of us brings to work each day. The sudden
gional structure to improve accountability and
shift to a new work environment that forced
streamlined our marketing operations to extend
distance between each of us was challenging, and
more agency management responsibilities to
ProAssurance rose to the occasion. The safety of
the decision makers in the underwriting process.
our employees, customers, and business partners
We continue to operate profitably in this line of
continues to be our highest priority. In spite of
business despite intense market competition,
our physical separation, we spent the year
and execute our rural underwriting strategy and
continuing to execute a comprehensive
short-tailed claim model to great effect.
business strategy to streamline our organiza-
tional structure and improve our profitability,
while further enhancing our culture.
Trends in our Segregated Portfolio Cell
Reinsurance segment were consistent with those
of the Workers’ Compensation Insurance and
In our Specialty Property & Casualty segment,
Specialty Property & Casualty segments – the
we continued our efforts to build a strong foun-
lines of business which cede premium to the
dation for the future and improve our competitive
captive cell programs. The captive cells play an
position. We consolidated operations, restruc-
increasingly important role for customers seeking
tured our field organization, re-underwrote the
to manage controllable expenses, particularly in
Specialty Healthcare business, strengthened rate
these uncertain economic conditions.
adequacy, reduced expenses, and incrementally
improved the current accident year net loss ratio.
We are proud of all that was achieved to address
profitability and deliver operational excellence.
Meanwhile, signs of a firming market continue
to emerge in our Specialty Healthcare business
in the form of rate gains and improved terms,
conditions, and coverage structures. Although
our top line contracted in 2020 as a result of our
Finally, we reduced our participation in Lloyd’s
Syndicate 1729 from 61% to 29% for the 2020 un-
derwriting year, and again from 29% to 5% for the
2021 underwriting year as we support and grow
our core insurance operations, and seek to reduce
volatility in our underlying performance. We’ve also
reduced our participation for Syndicate 6131 from
100% to 50% for the 2021 underwriting year.
re-underwriting and rate strengthening efforts,
Meanwhile, our consolidation of systems and
and the macro conditions in the property &
leveraging of new technology continues to
casualty industry remain challenging, we have
promote organizational efficiency in all aspects
positioned the segment to grow in the future.
of our business.
In our Workers’ Compensation Insurance seg-
As a result of our strategic restructuring initiatives
ment, we made organizational changes in 2020,
in 2020, which includes an overall reduction in our
1
workforce of approximately 13%, we anticipate
than we were a year ago. We are applying that
$17 million in annual expense savings. This
focus to our pending acquisition of the
is on top of initiatives taken in 2019 that reduced
NORCAL Group. As I write this letter, NORCAL
annual costs by $5 million, bringing us to
Mutual Insurance Company is soliciting its eligible
estimated cumulative annual cost reductions of
policyholders to vote on the plan to convert from
approximately $22 million since this leadership
a mutual company to a stock company. Policy-
team was put in place almost two years ago.
holders will have the option to take their
These changes, though often difficult, have
positioned us to achieve our long-term profit-
ability goals while enhancing the best-in-class
products and services we provide to our
customers. Our operational profitability in
the third and fourth quarters is evidence
that we are on the right track.
ownership share of the company in the form of
NORCAL stock, which ProAssurance will offer to
buy through our Tender Offer. There are several
steps remaining in the process, and we anticipate
being able to close the deal in the second quarter
of 2021, bringing another valued member into
the ProAssurance family of companies.
Being part of the ProAssurance family means being
While it was an important year of transformation,
committed to providing a safe and healthy working
our performance did not meet our standards. The
environment where all employees are treated with
operating loss for the year was attributable to
dignity and respect, allowing them to do their best
a pre-tax net underwriting loss of $45.7 million
work every day. The ideals of Diversity, Equity
associated with a tail policy issued to a large
and Inclusion (DE&I) have always been
national healthcare account, and a pre-tax
important at ProAssurance, and I am proud of
$10 million pandemic-related IBNR reserve, both
the emphasis placed on them in 2020. We will
of which were recorded in the second quarter.
foster and support DE&I efforts in 2021 with even
Our full-year net loss was attributable to a pre-
greater intentionality. Important in those efforts is
tax $161.1 million goodwill impairment charge
the formation of a DE&I Council, which held its first
recorded in the third quarter in recognition of
official meeting in January of 2021. I eagerly an-
market volatility and the depression our stock
ticipate the opportunities for positive change that
price experienced through the first nine months of
the Council’s work will present to us. The Executive
the year. We must, and will, continue to improve
Leadership Team and I are committed to ensuring
as we strive always to reward the trust given us
that ProAssurance is a place where everyone feels
by our customers and shareholders.
welcome and safe, and that we are providing equal
Over a year ago, as the COVID-19 virus began
opportunities to contribute, grow, and prosper.
to wreak havoc on our national economy and
The pandemic is not over, and the challenges
healthcare system, I noted that in the midst
present in healthcare professional liability and
of these extraordinary times, we are blessed to
workers’ compensation insurance industries
insure and employ extraordinary people.
remain formidable, but we are better positioned
That statement has proven truer with each
to meet and overcome these challenges as a
passing day, and I have every confidence that
result of our accomplishments in 2020.
ProAssurance, our customers, distribution part-
ners, employees, and shareholders will emerge
Thank you,
stronger on the other side of the pandemic.
The pursuit of operational excellence is a never-
ending journey, as we can always make ourselves
Ned Rand
better, and we are a more focused organization
President & Chief Executive Officer
2
Board of Directors
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
COMMITTEES
Independence
Audit
Executive
Nominating
& Corporate
Governance
N
I
I
I
I
I
I
I
N
I
I
I
C
M
C
M
M
M
M
C,E
M
M
M
M
M
M
C
Management, Non-Independent = N Independent = I Member = M Chairman = C Financial Expert = E
Executive Officers
Michael L. Boguski
President, Specialty P&C segment
Dana S. Hendricks
Executive Vice President, Chief Financial
Officer, and Corporate Treasurer
ProAssurance Corporation
Jeffrey P. Lisenby
Executive Vice President
General Counsel and Corporate Secretary
ProAssurance Corporation
Noreen L. Dishart
Executive Vice President, Chief Human
Resources Officer
ProAssurance Corporation
Edward L. Rand, Jr.
President and Chief Executive Officer
ProAssurance Corporation
Kevin M. Shook
President, Workers’ Compensation
Insurance and Segregated Portfolio
Cell Reinsurance segments
3
Compensation
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, 2020, 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, 2020.
Total Return Performance
$200
$150
$100
X
$50
$0
X
X
X
X
X
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
PERIOD ENDING (IN $)
INDEX
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
ProAssurance Corporation
X
100.00
S&P 500 Index
Russell 2000 Index
SNL Insurance P&C
100.00
100.00
100.00
128.28
111.96
121.31
118.02
144.24
136.40
139.08
134.93
106.83
130.42
123.76
129.73
98.41
171.49
155.35
152.23
49.51
203.04
186.36
154.96
ProAssurance®, Eastern Alliance®, Inova®, Medmarc®, Treated Fairly®, and the “Curl” device are registered trademarks of
ProAssurance Corporation or its subsidiaries. All Rights Reserved.
4
®
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2020,
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.
Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
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, 2020 was $770,102,748.
As of February 19, 2021, the registrant had outstanding approximately 53,893,267 shares of its common stock.
Documents incorporated by reference in this Form 10-K
(i)
The definitive proxy statement for the 2021 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
ALAE
AOCI
ASU
BEAT
Board
BOLI
CARES Act
CIMA
Council of Lloyd's
CODM
COSO
Commutation
COVID-19
DDR
Dodd-Frank Act
DPAC
Eastern Re
EBUB
ECO/XPL
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
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
Coronavirus Aid, Relief and Economic Security Act
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
Coronavirus Disease 2019
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
Extra-contractual obligations/excess of policy limit claims
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
3
Term
Medical Technology Liability
Model Holding Co. Law
Mortgage Loans
NAIC
NAV
NFIP
NOL
NORCAL
NORCAL Mutual
NRSRO
NYDFS
NYSE
OCI
ORSA
PCAOB
PDR
PICA
PREP Act
ProAssurance Plan
ProAssurance Savings Plan
Revolving Credit Agreement
ROE
ROU
SAP
SEC
SPA
SPC
Specialty P&C
Syndicate 1729
Syndicate 6131
Syndicate Credit Agreement
TCJA
TRIA
U.K.
ULAE
VIE
Meaning
Medical technology and life sciences products liability
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
NORCAL Group
NORCAL Mutual Insurance Company
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
Public Company Accounting Oversight Board
Premium deficiency reserve
ProAssurance Insurance Company of America
The Public Readiness and Emergency Preparedness Act
Executive non-qualified excess plan
ProAssurance group savings and retirement plan
ProAssurance's $250 million revolving credit agreement
Return on equity
Right-of-use
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
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
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
Exhibits and Financial Statement Schedules
9
21
34
34
34
35
36
38
117
120
120
120
120
122
122
122
122
122
123
5
General Information
Throughout this report, references to "ProAssurance," "PRA," "Company," "we," "us" and "our" 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. In addition, throughout this discussion we use certain terms and
abbreviations, which can be found in the Glossary of Terms and Acronyms provided at the beginning of this report.
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
changes in interpretations of certain coverages as a result of COVID-19;
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, including the actions taken by the federal government and Federal
Reserve in response to COVID-19;
resolution of uncertain tax matters and changes in tax laws, including the impact of the CARES Act;
changes in laws or government regulations regarding financial markets or market activity that may affect our
business;
changes in the ability, or perception thereof, 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 or by Syndicates 1729 and 6131;
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;
6
the effect of cyclical insurance industry trends on our underwriting, including demand and pricing in the
insurance and reinsurance markets in which we operate;
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, including the recent COVID-19 pandemic, as it relates to our business and
insurance operations, investment results, Lloyd's Syndicates and our insured risks;
the impact of the COVID-19 pandemic and related economic conditions on our premium volume, loss reserves,
investment portfolio, asset valuations, business operations and workforce;
the impact of a catastrophic man-made event, such as acts of terrorism, acts of war and civil and political unrest;
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;
failure to complete our planned acquisition of NORCAL for any reason including but not limited to failure to obtain
required regulatory approvals, or failure of any other condition set forth in the acquisition agreement, or our inability
to fund the transaction; and if completed, our failure to successfully integrate NORCAL to achieve expected results or
synergies after closing;
changes to the ratings assigned by rating agencies to our holding company or 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 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;
7
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 and other documents we file
with the SEC, such as our current reports on Form 8-K and our quarterly reports on Form 10-Q.
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, 2020, our net premiums written totaled $748 million, and at December 31, 2020 we had total assets of
$4.7 billion and $1.3 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
ProAssurance is a U.S. based specialty property and casualty and workers' compensation insurance carrier. Our specialty
property and casualty insurance products primarily include professional liability insurance and liability insurance for medical
technology and life sciences risks. We also provide capital to Syndicate 1729 which writes a range of property and casualty
insurance and reinsurance lines. In addition, we are a 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. On February 20, 2020, we entered into a
definitive agreement to acquire NORCAL, an underwriter of medical professional liability insurance, subject to the
demutualization of NORCAL Mutual, NORCAL's ultimate controlling party. Upon satisfaction of the various remaining
regulatory approvals required, we are anticipating to close the transaction in the second quarter of 2021. If consummated, the
transaction will provide strategic and financial benefits including additional scale and geographic diversification in the
physician professional liability market.
9
Our Strategy
We seek to generate an attractive total return for our shareholders while focusing on our culture and people. The basic
components of our strategy for achieving this objective are as follows:
• Pursue profitable underwriting opportunities. We emphasize profitability, not market share, and strive to achieve a
consistent level of underwriting profit over the various economic and insurance cycles. Key elements of our
approach are adhering to disciplined underwriting principles, including prudent risk selection and appropriate
pricing, as well as adjusting our business mix as necessary to effectively utilize capital and achieve long-term profit
objectives.
• Focus on culture and people. We strive to be the Employer of Choice by attracting, retaining and developing a
diverse group of employees who embody our Mission, Vision and Values. We are committed to fostering an
inclusive workplace in which variety of thought, creativity and innovation fuels employee engagement and
ultimately increases shareholder return. See further discussion on our employees and culture within this section
under the heading "Human Capital Resources."
• Provide specialized healthcare-centric expertise to meet evolving demands in the healthcare marketplace. Through
our focus on healthcare, we provide traditional liability insurance products to healthcare providers. We also
leverage our reach, expertise and financial strength to provide innovative and customized products to meet the risk
management needs of larger healthcare organizations or groups.
• Provide superior workers' compensation products and services. We provide workers' compensation products and
services that focus on increasing an organization's productivity while reducing costs. We do this by providing
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.
• Focus on operational excellence. Improve our competitive position by focusing on operational excellence and
productivity gains by leveraging technology, streamline operations, workflow improvements and proactive expense
management.
• 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.
• 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.
• 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 financial results in five segments, as follows:
•
Specialty P&C - This segment includes our professional liability business and medical technology liability
business. Our professional liability insurance is primarily comprised of medical professional liability products
offered to healthcare providers and institutions. We also offer, to a lesser extent, professional liability insurance 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.
10
• Workers' Compensation Insurance - This segment includes our workers' compensation insurance business which is
provided generally 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 solutions include program design, fronting, claims administration,
risk management, SPC rental, asset management and SPC management services. Alternative market premiums are
100% ceded to either SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an
unaffiliated captive insurer.
•
Segregated Portfolio Cell Reinsurance - This segment includes the 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. Each SPC is owned, fully or in part, by an agency, group or association and the 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
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.
• Lloyd's Syndicates - This segment includes the results from our participation in Lloyd's of London Syndicate 1729
and Syndicate 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. Syndicate 6131 is an SPA that underwrites on a quota share basis
with Syndicate 1729. Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and
reinsurance lines in both the U.S. and international markets 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, 2020, 2019 and 2018 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)
Year Ended December 31
2020
$ 522,911
246,791
72,843
84,718
61%
29%
9%
10%
2019
$ 577,700
278,442
87,140
110,905
60%
29%
9%
11%
2018
$ 577,196
293,230
85,086
88,746
60%
31%
9%
9%
(72,841)
(9%)
(86,697)
(9%)
(86,947)
(9%)
Total
$ 854,422
100%
$ 967,490
100%
$ 957,311
100%
(1) Primarily comprised of twelve month term policies, but includes premium related to policies with a twenty-four month term of $8.3 million
in 2020, $26.9 million in 2019 and $27.4 million in 2018. The majority of renewed twenty-four month term policies were re-underwritten
to twelve month term policies as we have ceased offering twenty-four month term policies beginning in the second quarter of 2020.
(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 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 2020 or 2019.
Assets are not allocated to segments because investments, other than the investments 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.
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 $22.6 million in 2020, $32.8 million in 2019 and $29.3 million in 2018 associated with
insurance exposures outside of the U.S. In addition, we had net written premium of $11.1 million and $8.8 million in 2020 and
2019, respectively, associated with international insurance exposures within our Specialty P&C segment.
11
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,
institutions (which includes hospitals, surgery centers and miscellaneous medical facilities) and, to a lesser extent, facilities
specializing in long term residential care. While a majority of our business is written in the Standard market, we also offer
professional liability insurance on an excess and surplus lines basis through our Specialty line of business; and we offer
alternative risk and self-insurance products on a customized basis.
Our custom alternative risk solutions include assumed reinsurance and a loss portfolio transfer program for healthcare
entities who, most commonly, are exiting a line of business, changing an insurance approach or simply looking for a more
tailored solution for transferring risk. Our custom alternative risk solutions also include a turnkey captive solution whereby we
cede all or a portion of the healthcare premium, net of reinsurance, to three SPCs of our wholly owned Cayman Islands
reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance segment.
Each SPC is owned, fully or in part, by an agency, group or association, and we currently have a 25% participation interest in
the results of one of these three SPCs. See further discussion that follows under the heading "Segregated Portfolio Cell
Reinsurance Segment." The portion not ceded to the SPCs is retained within our Specialty P&C segment. Total gross premiums
written in this segment in our alternative market captive cell program were approximately $7.1 million, $7.8 million and $5.8
million during 2020, 2019 and 2018, 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, 2020, approximately 76% 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 2020, our ten largest agents or
brokers produced approximately 32% of our HCPL premium; individually, no one agency or broker produced more than 7% 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 offices which permit us to consistently provide a high level of services to customers on a
local basis.
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, which is a part of
our Small Business Unit. Our legal professional liability coverage is a less significant portion of our business, accounting for
approximately 3% of our 2020 gross premiums written. This business offers errors and omissions liability insurance policies for
law firms engaged in the private practice of law. The program generally insures solo practitioners and smaller firms; almost all
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 33 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.
12
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, on both a primary and excess basis, for medical technology and life sciences companies. The vast
majority of these companies and the products they manufacture and/or distribute are regulated by the U.S. Food and Drug
Administration or similar regulatory authorities in foreign jurisdictions. Products insured cover a broad array of medical devices
and pharmaceuticals including imaging and non-invasive diagnostic devices, clinical lab instruments, medical instruments and
surgical supplies, dental products, orthopedic implants, animal pharmaceuticals and medical devices, durable medical
equipment and prescription and over-the-counter drugs. We also provide coverage for sponsors of clinical trials.
Underwriting analysis for medical technology liability encompasses the product's risk profile, loss history, the amount of
coverage being sought, level of the insured's retention, expertise and experience of the applicant and the expected volume of
product sales. Almost all of our medical technology liability business is written through independent brokers. In 2020, our top
ten largest brokers generated approximately 41% of our medical technology liability gross written premium, with no one broker
representing more than 9%. We do not appoint agents for our medical technology liability business. We defend our medical
technology liability claims vigorously, with a negotiated settlement being the most frequent means of resolution.
Workers' Compensation Insurance Segment
Our Workers' Compensation Insurance segment offers workers' compensation products primarily in 19 core states 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 solutions include program design, fronting, claims
administration, risk management, SPC rental, asset management and SPC management services. Of our total
alternative market premiums written, approximately 96% in 2020 and 97% in 2019 was ceded to the SPCs at Inova
Re and 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.
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 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. Each SPC
is owned, fully or in part, by an agency, group or association and the results of the SPCs are attributable 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 ranges from a low of 20% to a high of 85% as of December 31, 2020. 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 results of the SPCs are allocated among the cell participants in accordance with the terms of the cell agreements. SPC
results attributable 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 investment results of the
SPCs as the investments are solely for the benefit of the cell participants. The segment results reflect our share of the results of
the SPCs in which we participate. 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.
13
The underwriting, marketing and distribution of policies written in alternative market programs 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 the 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 results. The Syndicate Credit Agreement was issued for the purpose of providing working
capital to Syndicate 1729 with maximum 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 total fair value of approximately $106.2 million at December 31, 2020. See further 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 for the 2021 underwriting year is discussed in the
following paragraphs.
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. To support and grow our core insurance operations, we decreased our
participation in the results of Syndicate 1729 for the 2021 underwriting year to 5% from 29%. Syndicate 1729's maximum
underwriting capacity for the 2021 underwriting year is £185 million (approximately $253 million at December 31, 2020), of
which £9 million (approximately $13 million at December 31, 2020) is our allocated underwriting capacity.
Lloyd's Syndicate 6131
We provide capital 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 underwrites on a quota share basis with Syndicate
1729. Effective July 1, 2020, Syndicate 6131, entered into a six-month quota share reinsurance agreement with an unaffiliated
insurer. Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the
unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and we decreased our participation in the results of
Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Syndicate 6131's maximum underwriting capacity for the
2021 underwriting year is £20 million (approximately $27 million at December 31, 2020), of which £10 million (approximately
$14 million at December 31, 2020) is our allocated underwriting capacity.
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
14
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 several 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 continue to focus on
offering unique, joint or cooperative insurance programs that are attractive to larger healthcare entities.
The workers’ compensation industry is highly competitive in the geographic markets in which we operate. 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 2021. 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
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regulates insurance holding company systems, including acquisitions, the payment of dividends, the terms of affiliate
transactions, enterprise risk and solvency management and other related matters.
Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation or reorganization of
insurance companies.
Insurance companies are also subject to state and federal legislative and regulatory measures and judicial decisions. These
could include new or updated definitions of risk exposure and limitations on business practices.
Insurance Regulation Concerning Change or Acquisition of Control
The insurance regulatory codes in each of the domiciliary states of our operating subsidiaries contain provisions (subject
to certain variations) to the effect that the acquisition of “control” of a domestic insurer or of any person that directly or
indirectly controls a domestic insurer cannot be consummated without the prior approval of the domiciliary insurance regulator.
In general, a presumption of “control” arises from the direct or indirect ownership, control or possession with the power to vote
or possession of proxies with respect to 10% (5% in Alabama) or more of the voting securities of a domestic insurer or of a
person that controls a domestic insurer. Because of these regulatory requirements, any party seeking to acquire control of
ProAssurance or any other domestic insurance company, whether directly or indirectly, would usually be required to obtain
such approvals.
In addition, certain state insurance laws contain provisions that require pre-acquisition notification to state agencies of a
change in control of a non-domestic insurance company admitted in that state. While such pre-acquisition notification statutes
do not authorize the state agency to disapprove the change of control, such statutes do authorize certain remedies, including the
issuance of a cease and desist order with respect to the non-domestic admitted insurers doing business in the state if certain
conditions exist, such as undue market concentration.
Insurance Regulation Concerning Cybersecurity
In March 2017, 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.
Each of the domiciliary states of our insurance subsidiaries, excluding Pennsylvania, has enacted data security or data
privacy acts. Alabama enacted the Alabama Data Breach Notification Act of 2018 effective June 1, 2018, Illinois enacted the
Illinois’ Personal Information Protection Act effective January 1, 2020, Vermont enacted the Data Breach Notification law
effective July 1, 2020 and Michigan enacted the Michigan's Data Security Act effective January 20, 2021. Additionally,
California's Consumer Privacy Act of 2018 was effective January 1, 2020. 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
domiciliary state of Pennsylvania, 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 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.
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Regulation of Dividends and Other Payments from Our Operating Subsidiaries
Our U.S. operating subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of
dividends or distributions an insurance company may pay to its shareholders, including our insurance holding company, without
prior regulatory approval. Generally, dividends may be paid only out of unassigned earned surplus. In every case, surplus
subsequent to the payment of any dividends must be reasonable in relation to an insurance company’s outstanding liabilities and
must be adequate to meet its financial needs.
State insurance holding company regulations generally require domestic insurers to obtain prior approval of extraordinary
dividends. Insurance holding company regulations that govern our principal operating subsidiaries deem a dividend as
extraordinary if the combined dividends and distributions to the parent holding company in any twelve-month period exceed
prescribed thresholds. Such thresholds are statutorily prescribed by the state of domicile and currently are based on either net
income for the prior fiscal year (reduced by realized capital gains in certain domiciliary states) or a percentage of unassigned
surplus at the end of the prior fiscal year, depending upon the wording of the statute.
If insurance regulators determine that payment of a dividend or any other payments within a holding company group,
(such as payments under a tax-sharing agreement or payments for employee or other services) would, because of the financial
condition of the paying insurance company or otherwise, be a detriment to such insurance company’s policyholders, the
regulators may prohibit such payments that would otherwise be permitted.
Risk-Based Capital and Risk Assessment
In order to enhance the regulation of insurer solvency, each state of domicile in accordance with an NAIC-defined
formula specifies risk-based capital requirements for property and casualty insurance companies. At December 31, 2020, 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, 2020, 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, 2020 or 2019.
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.
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Certain states in which we write workers’ compensation insurance have established administrative and/or second injury
funds that levy assessments against insurers that write business in their state. The assessments are generally based on insurer’s
proportionate share of premiums or losses in a particular state, and the assessment rate can vary from year to year.
Shared Markets
State insurance regulations may force us to participate in mandatory property and casualty shared market mechanisms or
pooling arrangements that provide certain insurance coverage to individuals or other entities that are otherwise unable to
purchase such coverage in the commercial insurance marketplace. Our operating subsidiaries’ participation in such shared
markets or pooling mechanisms is not material to our business at this time.
Federal Regulation
The Dodd-Frank Act was enacted in July 2010 and established additional regulatory oversight of financial institutions. To
date, the Dodd-Frank Act has not materially affected our business. However, development of regulations is not complete, and
there could yet be changes in the regulatory environment that affect the way we conduct our operations or the cost of
compliance, or both.
One of the federal government bodies created by the Dodd-Frank Act was the FIO which in December 2013 released a
proposal on insurance modernization and improvement of the system of insurance regulation in the U.S. Although the FIO is
prohibited from directly regulating the business of insurance, it has authority to represent the U.S. in international insurance
matters and has limited power to preempt certain types of state insurance laws. The proposal advocates significantly greater
federal involvement in insurance regulation and identifies necessary reforms by the states to preclude further consideration of
direct federal regulation. While the proposal does not necessarily imply that the federal government will displace state
regulation completely, it does recommend more of a hybrid approach to insurance regulation. In response to the FIO proposal,
the NAIC and a number of state legislatures have considered or adopted legislative proposals that alter and, in many cases,
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 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 2021. 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. 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 5 of the Notes to Consolidated Financial Statements.
In response to COVID-19, the CARES Act was signed into law on March 27, 2020 and contains several provisions for
corporations and eases certain deduction limitations originally imposed by the TCJA. The CARES Act, among other things,
includes temporary changes regarding the prior and future utilization of NOLs, temporary changes to the prior and future
limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social
Security taxes and the creation of certain refundable employee retention credits. See further discussion of the impact of the
CARES Act on our results of operations and financial position provided in Item 7, Management's Discussion and Analysis, in
the Critical Accounting Estimates section under the heading "Taxes" or Note 5 of the Notes to Consolidated Financial
Statements.
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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 2021 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.
COVID-19
In response to COVID-19, the federal government and a number of states have introduced or adopted legislation to
address issues related to the pandemic. The PREP Act was amended on March 27, 2020 to extend liability immunity for
activities related to medical countermeasures against COVID-19, except for claims involving "willful misconduct" as defined in
the PREP Act. Certain states have also established immunities for healthcare providers. Depending on the number of states that
institute such changes and the terms of the changes, as well as the impact of the amendment to the PREP Act and any related
legal challenges, we may experience a reduction in claims frequency and severity for our healthcare professional liability book
of business.
With respect to workers' compensation coverages, some states have enacted legislation changes designed to effectively
expand coverage by establishing a presumption of compensability for certain types of workers. Other states are considering
similar measures. Depending on the number of states that institute such changes and the terms of the changes, we may
experience increases in claims frequency and severity for our workers’ compensation book of business, which could have an
effect on our financial condition, results of operations and cash flows.
Furthermore, we are closely monitoring the impact of potential legislation or court decisions that could retroactively
require insurers to extend certain insurance to cover COVID-19 claims, even if the original contract excluded the cover of
communicable diseases as is typical in certain policies; however, to date, legislative attempts have been unsuccessful. If
successful, these actions could result in an increase in claim frequency and severity due to an unintended increase in exposure
for Syndicate 1729 and 6131 which could have an effect on our financial condition, results of operations and cash flows given
our participation in those Syndicates.
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.
Effective January 1, 2016, the European Union's executive body, the European Commission, implemented capital
adequacy and risk management regulations called Solvency II that applies to businesses within the European Union. 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 which lasted until December 31, 2020. Following the transition period, a new trade deal went into effect
January 1, 2021 between the U.K. and European Union. 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. As of December 31, 2020, Lloyd's
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Brussels has moved all legacy EEA business to Brussels via a Part VII portfolio transfer, which allowed insurers and reinsurers
to transfer portfolios of insurance business from one legal entity to another.
Human Capital Resources
We are a people business and we are committed to our employees as well as those individuals whom our employees serve.
We aim to attract, develop, and retain a diverse group of employees who embody our Mission, Vision and Values.
We are committed to providing a safe and healthy working environment where all employees are treated with dignity and
respect, allowing them to do their best work. Further, we seek to provide equal opportunities while fostering a diverse and
inclusive workplace that promotes employee engagement. To ensure our workforce is comprised of a diverse group of highly-
qualified individuals, we are committed to advertising job openings and sourcing candidates through broad-reaching techniques.
We are committed to a strategy of workforce diversity and inclusion at all levels of the Company, starting with our Board and
extending through all levels within our organization. Further, we seek to provide a fulfilling work experience through the
creation of well-documented career paths and opportunities for advancement, robust training and development programs and
the management of transparent salary administration practices. Our competitive pay and benefit programs are designed to
reward, support and retain our employees.
We are committed to facilitating and fostering employee engagement. To support those objectives, we measure employee
engagement and satisfaction by conducting “Pulse” surveys that gain real-time feedback from our employees on key issues. The
results are shared with all employees and the data is used to steer our continuous improvement efforts. We regularly monitor
and evaluate turnover metrics to ensure we are responsive to the evolving, competitive market for top talent.
In the event of downsizing and lay-offs are necessary, we provide favorable severance packages that include support of re-
employment. During 2020, in response to the external environment and to improve our future competitive position, we
restructured our Specialty P&C and Workers' Compensation Insurance segments to better serve our policyholders and agency
partners. As a result, we transformed our workforce through a combination of early retirement, job eliminations, reassignments
and promotions that spanned our entire organization.
Some examples of key programs and initiatives that are focused on attracting, developing and retaining our diverse
workforce include:
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•
•
Diversity, Equity and Inclusion - To advance our commitment to fostering a diverse, inclusive and equitable
workplace, in 2020 we engaged an external professional services partner to help guide the identification of short and
long-term strategies. One specific strategy is the formation of a Diversity, Equity and Inclusion Council comprised of
employees from across the organization who serve as an ongoing resource to the organization in identifying objectives
and tracking achievements. We continue to enhance our professional development and training programs to further
build knowledge, understanding and skill in support of full cultural competency. We anticipate the development and
training aspects of this initiative to be achieved within the first half of 2021.
Employee and Leadership Development - We invest in training and development programs that support our Mission,
Vision and Values, encourage continuous learning, equip employees for advancement and encourage a long-term
partnership with the Company. We provide career paths for employees to continue to advance their technical skills. To
grow the skills of our current managers and plan for future succession needs, we provide a tiered leadership
development program, Leadership That Works that includes both in-person group and self-led content.
Employee Health and Welfare - We recognize the importance of a comprehensive benefits strategy to support the
unique needs of all employees. We made several key changes in 2020 that address the expanding needs of our
employees as a result of the pandemic. We adopted all guidelines of the CARES Act including the retirement plan
withdrawal and loan provisions. In addition, we implemented the applicable guidelines of the Families First
Coronavirus Response Act. We expanded our virtual health management benefits to include mental well-being and
enhanced our accident and critical illness program. In addition, we implemented a new benefit offering which includes
access to a service provider that offers assistance and expertise in navigating federal and state programs including
social security, disability, unemployment and retirement.
COVID-19 Response - At the onset of the pandemic, we responded by transitioning the majority of our employees to
work remotely. As it was safe to do so, we began to allow employees to voluntarily return to the office and
implemented mandatory employee training, social distancing, handwashing, daily health questionnaires and other
safety measures. We continue to regularly monitor the situation at the highest level of the organization, implementing
changes to strategy as appropriate. Returning to the office will continue to be 100% voluntary for the foreseeable
future.
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ProAssurance Corporation and our subsidiaries are equal opportunity employers and we do not discriminate either directly
or indirectly against employees or prospective employees on the basis of race, color, religion, sex, sexual preference/orientation,
citizenship, marital status, veteran status, national origin, age or disability, or any other attribute protected by applicable law or
regulation. At December 31, 2020, we had 827 employees, none of whom were represented by a labor union. We consider our
employee relations to be good.
Enterprise Risk Management
As a 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.
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 four categories: Insurance, Financial, Operational and General.
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 and other periods of reduced competition. The professional liability area has been particularly affected by these
cycles. Underwriting cycles are generally driven by an excess of capacity available and actively pursuing business that is
deemed profitable. This action drives pricing down. Since the professional liability industry has a long development period,
prices typically fall too far resulting in poor underwriting results for a period of time. The reaction is then a withdrawal of
capacity, reduced availability of coverage offerings and price increases. In past cycles, these actions improve profitability over a
few years inviting new capital into the market again which causes the cycle to repeat. Events other than price can also have a
material effect on the duration and depth of the underwriting cycles, such as severity spikes, tort reforms, abrupt frequency
changes or reinsurance availability. Changes in the frequency and severity of losses may affect the cycles of the insurance and
reinsurance markets significantly. During "soft markets" where price competition is high and underwriting profits are poor,
growth and retention of business become challenging which may result in reduced premium volume. During the initial stages of
"hard markets", premium volumes rise for existing business and retention levels fall. As more carriers enter this action phase,
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underwriting profits begin to improve, although their achievement may take several years to materialize. As the cycle
progresses, opportunities may then be presented to grow profitably at the higher premium levels.
The Company's results of operations could be adversely impacted by catastrophes, both natural and man-made, pandemics,
severe weather conditions, climate change or closely related series of events.
Catastrophes can be caused by unpredictable natural events such as hurricanes, windstorms, severe storms, tornadoes,
floods, hailstorms, severe winter weather, earthquakes, explosions and fire, and by other natural and man-made events, such as
terrorist attacks, civil and political unrest, as well as pandemics and other similar outbreaks in many parts of the world,
including the recent outbreak of a coronavirus referred to as COVID-19. 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. These events may have a material adverse effect on
our workforce and business operations as well as the workforce and operations of our insureds and independent agents. Some of
the assets in our investment portfolio may be adversely affected by declines in the equity markets, changes in interest rates,
reduced liquidity and economic activity caused by large-scale catastrophes, pandemics, terrorist attacks or similar events which
could have a material adverse effect on our financial position, results of operations and liquidity.
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.
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:
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•
•
•
•
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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
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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.
As previously discussed under the heading "Insurance Regulatory Matters," we are closely monitoring the impact of potential
legislation or court decisions that could effectively expand workers' compensation coverage by establishing a presumption of
compensability for certain types of workers which could result in an increase in claim frequency and severity for our workers'
compensation book of business. As it relates to our exposures through our participation in Syndicate 1729 and Syndicate 6131,
we are also monitoring the impact of potential legislation or court decisions that could retroactively require insurers to extend
certain insurance to cover COVID-19 claims, even if the original contract excluded the cover of communicable diseases, which
could result in an increase in claim frequency and severity for Syndicate 1729 and Syndicate 6131 due to an unintended
increase in exposure. These attempts to date, however, have been unsuccessful. In addition, extension of statutes of limitations
in some states could result in assertion of covered claims that otherwise would have been time-barred. We cannot predict the
occurrence of such claim, the magnitude of any associated liability if such claims occur, or the effect of such claims on our
financial results. Further, 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. Since there is no industry standard for assumptions and preparation of insured data for use in these
models, our modeled losses may not be comparable to estimates made by other companies. The modeled outputs and related
analyses from both proprietary and third parties are subject to various assumptions, uncertainties, model design errors and the
inherent limitations of any statistical analysis, including those arising from the use of historical internal and industry data and
assumptions. 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
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reinsurance. We may be unable to maintain current reinsurance coverage or to obtain other reinsurance coverage in adequate
amounts and at favorable rates. If we are unable to renew our expiring coverage or to obtain new reinsurance coverage, either
our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would need to
reduce the amount of our underwritten risk.
Our claims handling could result in a bad faith claim against us.
We have been sued from time to time for allegedly acting in bad faith during our handling of a claim. The damages
claimed in actions for bad faith may include amounts owed by the insured in excess of the policy limits as well as consequential
and punitive damages. Awards above policy limits are possible whenever a case is taken to trial. These actions have the
potential to have a material and adverse effect on our financial condition and results of operations.
If we are unable to maintain favorable financial strength ratings, it may be more difficult for us to write new business or renew
our existing business.
Independent rating agencies assess and rate the claims-paying ability and the financial strength of insurers based upon
criteria established by the agencies. Periodically the rating agencies evaluate us to confirm that we continue to meet the criteria
of previously assigned ratings. The financial strength ratings assigned by rating agencies to insurance companies represent
independent opinions of financial strength and ability to meet policyholder and debt obligations and are not directed toward the
protection of equity investors.
Our principal operating subsidiaries hold favorable claims paying ratings with A.M. Best, Fitch and Moody’s. Claims-
paying ratings are used by agents, brokers and customers as an important means of assessing the financial strength and quality
of insurers. If our financial position deteriorates or the rating agencies significantly change the rating criteria that are used to
determine ratings, we may not maintain our favorable financial strength ratings from the rating agencies. A downgrade or
involuntary withdrawal of any such rating could limit or prevent us from writing desirable business.
The following table presents the claims paying ratings of our core insurance subsidiaries as of February 19, 2021.
ProAssurance Indemnity Company, Inc.
ProAssurance Casualty Company
ProAssurance Specialty Insurance Company, Inc.
ProAssurance Insurance Company of America
Noetic Specialty Insurance Company
Medmarc Casualty Insurance Company
Lloyd's Syndicate 1729 and Syndicate 6131 (2)
Eastern Alliance Insurance Company
Allied Eastern Indemnity Company
Eastern Advantage Assurance Company
Inova Re Ltd., SPC
Eastern Re Ltd., SPC
(1) NR indicates that the subsidiary has not been rated by the listed rating agency.
(2) Rating provided is the rating applicable to all Lloyd's syndicates.
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
NR
NR
A.M. Best
(www.ambest.com)
A (Excellent)
A (Excellent)
A (Excellent)
A (Excellent)
Rating Agency (1)
Fitch
(www.fitchratings.com)
A- (Strong)
A- (Strong)
A- (Strong)
A- (Strong)
Moody’s
(www.moodys.com)
A3
A3
NR
A3
A- (Strong)
A- (Strong)
A- (Strong)
A- (Strong)
A- (Strong)
A- (Strong)
NR
NR
NR
NR
NR
A3
A3
NR
NR
NR
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.
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As a member of the Lloyd's market and a capital provider to Lloyd's Syndicate 1729 and Syndicate 6131 we are subject to
certain risks which could affect us.
As a participant in Lloyd's Syndicates, we are subject to certain risks and uncertainties, including the following:
•
•
•
•
•
•
•
•
reliance on insurance and reinsurance brokers and distribution channels to distribute and market products;
obligation to pay levies to Lloyd's;
obligations to maintain funds to support underwriting activities and risk-based capital requirements that are
assessed periodically by Lloyd's and subject to variation;
ability to maintain liquidity to fund claims payments, when due;
ability to obtain reinsurance and retrocessional coverage to protect against adverse loss activity;
reliance on ongoing approvals from Lloyd's and various regulators to conduct business, including a requirement
that Annual Business Plans be approved by Lloyd's before the start of underwriting for each account year;
financial strength ratings are derived from the rating assigned to Lloyd's, although they have limited ability to
directly affect the overall Lloyd's rating; and
reliance on Lloyd's trading licenses in order to underwrite business outside the U.K.
Financial
We cannot guarantee that our reinsurers will pay in a timely fashion or at all, and as a result, we could experience losses.
We transfer part of our risks to reinsurance companies in exchange for part of the premium we receive in connection with
the risk. Although our reinsurance agreements make the reinsurer liable to us to the extent the risk is transferred, our liability to
our policyholders remains our responsibility. Reinsurers may periodically dispute our demand for reimbursement from them
based upon their interpretation of the terms of our agreements or may fail to pay us for financial or other reasons. If reinsurers
refuse or fail to pay us or fail to pay on a timely basis, our financial results and/or cash flows could be adversely affected and
could have a material effect on our results of operations in the period in which uncollectible amounts are identified.
At December 31, 2020 our receivable from reinsurers on unpaid losses and loss adjustment expenses was $385 million,
our receivable from reinsurers on paid losses and loss adjustment expenses was $14 million and our expected credit losses
associated with our reinsurance receivables (related to both paid and unpaid losses) were nominal in amount. As of
December 31, 2020, no reinsurer, on an individual basis, had an estimated net amount due which exceeded $51 million.
The impact of the COVID-19 pandemic and related general economic conditions could have a material adverse effect on our
results of operations, financial position or liquidity.
The continuing global COVID-19 pandemic has impacted the global economy, financial markets and our results of
operations. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not
yet known and may not emerge for years. Impacts to our results of operations could be widespread and material, including but
not limited to, the following:
•
•
•
•
•
•
•
•
•
•
•
continued volatility and further disruption in global financial markets that could materially affect our investment
portfolio valuations and returns;
declining interest rates which could reduce future investment results;
negative impact on premium volume due to reduced demand and decreased insured exposures due to the impact of
COVID-19 on general economic activity, especially for lines of business that are sensitive to rates of economic growth
and those that are impacted by audit premium adjustments;
negative impact on expense ratios due to reduced premium volume;
increases in frequency and/or severity of compensable claims, losses litigation and related expenses;
losses from COVID-19 related claims could be greater than our reserves for those losses;
government mandates and/or legislative changes in response to COVID-19, including, but not limited to: actions
prohibiting an insurance company from canceling insurance policies in accordance with policy terms; requiring an
insurance company to cover losses when its policies specifically excluded coverage or did not provide coverage;
preventing an insurance company from filing for a rate increase; ordering an insurance company to provide premium
refunds; granting premium grace periods and presumed COVID-19 compensability for all or certain occupational
groups;
increased credit risk;
reduced cash flows from premium credits and from our policyholders delaying premium payments;
increased cybersecurity risk as criminals seek new ways to target shifting business models; and
business disruption to independent insurance agents and brokers.
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We are taking precautions to protect the safety and well-being of our employees while providing uninterrupted service to
our policyholders and claimants. It is not possible at this time to estimate the impact that COVID-19 could have on our results
of operations and financial condition, as the impact will depend on future developments, which are highly uncertain and cannot
be predicted. Further, to the extent the COVID-19 pandemic adversely affects our business and financial results, it may also
have the effect of heightening many of the other risks described herein.
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 on an annual basis or upon the occurrence of certain triggering events or substantive changes in
circumstances that indicate the asset may be impaired. 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 (loss). Such write downs could have a material adverse effect on our results of operations or financial
position.
Our investment results may be impacted by changes in interest rates, U.S. monetary and fiscal policies as well as broader
economic conditions.
Changes in interest rates and U.S. fiscal, monetary and trade policies as well as broader economic conditions could have a
material adverse effect on our investment results. Fluctuations in the value of our investment portfolio can occur as a result of
these changes. 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 (loss) 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.
Our investments are subject to credit, prepayment and other risks.
A significant portion of our total assets ($3.4 billion or 73%) at December 31, 2020 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 impairment of our securities, which could affect our financial condition, results of operations or cash
flows.
At December 31, 2020 approximately 20% 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, 2020 the fair value of our state/municipal portfolio was $332.9 million (amortized cost basis of $316.0
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.
Our tax credit partnership interests are subject to risks related to the potential forfeiture of the tax credits and all or a
portion of the previously claimed tax credits. Loss of all or a portion of the tax credits might occur if the property owner fails to
meet the specified requirements of planning and constructing or, in the case of the qualified affordable housing project tax
credits, fails to operate the property as required or below expected capacity. Changes to tax rates may change the expected
duration of the utilization of tax credits. While this would not impact the amount of tax credits we receive, a change in duration
could be impactful from an economic perspective due to the time value of money. Additionally, if tax rates were to decrease the
26
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 impairment. At December 31, 2020 the carrying value of our tax credit
partnership interests was approximately $27.7 million.
In a period of market illiquidity and instability, the fair values of our investments are more difficult to assess, and our
assessments may prove to be greater or less than amounts received in actual transactions.
At December 31, 2020 and in accordance with applicable GAAP, we valued 96% of our investments at fair value and the
remaining 4% 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, 2020, we valued approximately 12% 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, 2020, approximately
77% 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, 2020, approximately 7% 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 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.
Our Revolving Credit Agreement, which expires in November 2024, permits borrowings of up $300 million. The
agreement requires that our consolidated debt to capital ratio (0.17 to 1.0 at December 31, 2020) be 0.35 to 1.0 or less and that
we maintain a minimum net worth of $1 billion which represented 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.
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. On November 30, 2020, the U.S. Federal
Reserve announced that it intends for all contracts written with LIBOR benchmarks to end on or before June 30, 2023. The U.S.
Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.
financial institutions, announced the 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. During 2020, the FASB issued guidance intended to assist stakeholders during the market-wide reference rate transition
period and is effective for a limited period between March 12, 2020 and December 31, 2022. The guidance provides optional
27
expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR
or another reference rate that is expected to be discontinued because of reference rate reform.
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 available-for-sale fixed
maturities portfolio which represented approximately 6% of our total investments, or $191 million, as of December 31, 2020;
34% of these investments with exposure to LIBOR were issued during 2020 or 2019 and include provisions for an alternative
benchmark rate. Optional expedients for contract modifications include a prospective adjustment that does not require contract
remeasurement or reassessment of a previous accounting determination; therefore, the modified contract is accounted for as a
continuation of the existing contract. 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, changes in federal tax law as a result of the
TCJA 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 change in U.S. federal tax law as a result of the TCJA
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, 2020 we had a net deferred tax asset of
approximately $57.1 million and a net federal income tax receivable of approximately $18.9 million, which included a liability
for unrecognized current tax benefits of $5.2 million.
Operational
Changes due to financial reform legislation could have a material effect on our operations.
The U.S. federal government generally has not directly regulated the insurance industry except for certain areas of the
market, such as insurance for flood, nuclear and terrorism risks. However, the federal government has undertaken initiatives or
considered legislation in several areas that may affect the insurance industry. The Dodd-Frank Act was enacted in July 2010
and established additional regulatory oversight of financial institutions (see previous discussion under the heading "Insurance
Regulatory Matters"). Our business could be affected by changes to the U.S. system of insurance regulation including
legislative or regulatory requirements imposed by or promulgated in connection with the Dodd-Frank Act.
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 protect the rights of a defendant 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
28
ultimately upheld by the courts. Furthermore, if tort reforms are effective, the business of providing professional liability
insurance may become more attractive, thereby causing an increase in competition. In addition, the enactment of tort reforms
could be accompanied by legislation or regulatory actions that may be detrimental to our business because of expected benefits
which may or may not be realized. These expectations could result in regulatory or legislative action limiting the ability of
professional liability insurers to maintain rates at adequate levels.
Coverage mandates or other expanded insurance requirements could also be imposed. States may also consider state-
sponsored insurance entities that could remove our potential insureds from the private insurance market.
We continue to monitor developments on a state-by-state basis and make business decisions accordingly.
Our performance is dependent on the business, economic, regulatory and legislative conditions of states where we have a
significant amount of business.
Our top five states, Pennsylvania, Alabama, Indiana, Texas and Michigan, represented 39% of our direct premiums
written for the year ended December 31, 2020. Moreover, on a combined basis, Pennsylvania, Alabama and Indiana accounted
for 28% of our direct premiums written for each of the years ended December 31, 2020, 2019 and 2018. 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
including the ineffective integration of underwriting, risk management, claims handling, finance, information technology and
actuarial practices and the design and operation of internal controls over financial reporting. Difficulties integrating an acquired
business may also result in the acquired business performing differently than we expected including the loss of customers or in
our failure to realize anticipated growth or expense-related efficiencies. We could be adversely affected by the acquisition due
to unanticipated performance issues and additional expense, unforeseen or adverse changes in liabilities, including liabilities
arising from events prior to the acquisition or that were unknown to us at the time of the acquisition, transaction-related
charges, diversion of management time and resources to integration challenges, loss of key employees, regulatory requirements,
exposure to tax liabilities, exposure to pension liabilities, amortization of expenses related to intangibles, and charges for
impairment of assets or goodwill.
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.
There are numerous risks and uncertainties around the Company's planned acquisition of NORCAL.
On February 20, 2020 we entered into a definitive agreement to acquire NORCAL, an underwriter of medical professional
liability insurance, subject to the demutualization of NORCAL Mutual, NORCAL's ultimate controlling party. See Note 9 of
the Notes to Consolidated Financial Statements for further information. If consummated, the transaction will provide strategic
and financial benefits including additional scale and geographic diversification in the physician professional liability market and
is expected to be accretive to earnings over time; nevertheless, there are numerous risks and uncertainties around the
transaction. The completion of our planned acquisition of NORCAL is subject to a number of conditions, including required
regulatory approvals. The failure to satisfy all the required conditions could prevent the acquisition from occurring. In addition,
regulators could impose additional requirements or obligations as conditions for their approval. We can provide no assurance
that we will obtain the necessary approvals within the estimated timeframe or at all, or that any such requirements that are
29
imposed by regulators would not result in the termination of the transaction. Investors’ reactions to a failure to complete the
acquisition of NORCAL, including possible speculation about alternative uses of capital, may cause volatility in our stock
price. A failure to complete a proposed transaction of this nature could also result in litigation by ProAssurance stockholders or
by NORCAL or its policyholders asserting monetary harm due to the failure of the transaction.
In addition, even if we complete the proposed NORCAL acquisition, we may not be able to successfully integrate
NORCAL into our business and therefore may not be able to achieve expected synergies. Furthermore, the significant
disruptions on global financial markets as a result of the COVID-19 pandemic could impact the future operating performance of
NORCAL negatively, as well as negatively impact the fair value of its assets and liabilities. Therefore, our liquidity may be
adversely impacted should NORCAL's operating performance deteriorate, requiring our holding company to infuse capital into
NORCAL or preventing the ability to distribute capital from NORCAL to our holding company due to regulatory restrictions or
other reasons.
In early 2021, we plan to finance a portion of our acquisition of NORCAL. Our ability to arrange additional financing or
refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market
conditions and other factors beyond our control. There can be no assurance that we will be able to obtain additional financing or
refinancing, if needed, on terms acceptable to us or at all. If we are not able to access capital on acceptable terms, we may
encounter difficulty funding the transaction, our business requirements, including debt repayments when they become due, or
both. In addition, due to the impacts of the COVID-19 pandemic, we could experience loss of revenue and profits due to
delayed payments or insolvency of insureds facing liquidity issues as well as lower yields on our investment portfolio. As a
result, we may be compelled to take additional measures to preserve our cash flow, including the reduction of operating
expenses or reduction or suspension of dividend payments, at least until the impacts of the COVID-19 pandemic improve.
Further, the COVID-19 pandemic’s potential disruption to our business operations may require us to access our Revolving
Credit Agreement which we have anticipated utilizing to partially fund the NORCAL transaction. Thus, we may be required to
raise additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements.
Increased levels of indebtedness associated with the NORCAL transaction or due to meeting our operational needs could
make us more vulnerable to general adverse economic, regulatory and industry conditions in a period of uncertainty and
volatility. This indebtedness could have the effect, among other things, of reducing our flexibility to respond to changing
business and economic conditions and increasing interest expense. The increased levels of indebtedness following completion
of the acquisition could also reduce funds available for working capital, capital expenditures, acquisitions and other general
corporate purposes and may create competitive disadvantages relative to other companies with lower debt levels. If we do not
achieve the expected benefits and cost savings from the NORCAL acquisition, or if the financial performance of the combined
company does not meet current expectations, our ability to service our indebtedness may be adversely impacted.
Any of these events could materially adversely affect our business, financial condition, results of operations, cash flows,
liquidity and stock price.
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.
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. As of December 31, 2020, we currently have no preferred stock outstanding.
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.
30
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 external revenue is our investment revenues. In addition, cash
dividends and other permitted payments from operating subsidiaries represent another source of funds. 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.
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.
Effective January 1, 2016, the European Union's executive body, the European Commission, implemented capital
adequacy and risk management regulations called Solvency II that apply to businesses within the European Union. Syndicate
1729 and Syndicate 6131 follow the Solvency II compliance guidelines set out by the Council of Lloyd's.
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
31
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 2020, 2019 or 2018. 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 2020, 2019 or 2018.
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 $0.05 per share dividend for
the three months ended December 31, 2020. 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.
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
32
unauthorized access to our data and systems. We regularly add additional security measures to our computer systems and
network infrastructure to mitigate the possibility of cybersecurity breaches, including firewalls and penetration testing.
However, it is impossible to defend against every risk being posed by changing technologies. The Company has a formal
process in place for identifying, handling and disclosing of cybersecurity incidents. In addition, the Company's Board and Audit
Committee are involved in the oversight of our cybersecurity policies and procedures and are continually updated on material
cybersecurity risks and cybersecurity issues, if any, faced by executive management. To date, the Company is not aware of any
material harm or loss relating to cyber-attacks or other security breaches at the Company or its third parties.
General
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.
In June 2020, a putative class action lawsuit was filed against the Company in the Northern District of Alabama, alleging
violations of the Securities Exchange Act of 1934 and alleging that the Company made false and misleading statements
regarding its Specialty Property and Casualty segment. The Company believes the lawsuit is without merit and intends to
defend it vigorously; however, there can be no assurance regarding the ultimate outcome of the matter.
If we fail to maintain proper and effective internal controls over financial reporting, our operating results and our ability to
operate our business could be harmed.
We continually enhance our operating procedures and internal controls to effectively support our operations and comply
with our regulatory and financial reporting requirements. As a result of the inherent limitations in all control systems, no system
of controls can provide absolute assurance that all control objectives have been or will be met, and that instances of fraud, if
any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of an error or mistake. Additionally, controls can be circumvented by the
unauthorized and wrongful individual acts of some persons or by collusion of two or more persons. The design of any system of
controls is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Further,
the design of a control system must reflect the fact that resource constraints exist. Accordingly, our control system can provide
only reasonable, not absolute, assurance of achieving the desired control objectives.
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 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.
33
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
ITEM 3.
LEGAL PROCEEDINGS.
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
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.
34
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.
Michael L. Boguski
Noreen L. Dishart
Dana S. Hendricks
Jeffrey P. Lisenby
Kevin M. Shook
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 54)
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 35 years of insurance industry experience. (Age 58)
Noreen L. Dishart was appointed as an Executive Vice President in 2020 and has served as our
Chief Human Resources Officer since 2015. Ms. Dishart has previously served as Vice President of
Human Resources of our Eastern subsidiary for 9 years. Ms. Dishart has over 35 years of
experience in Human Resources including positions with Johnson & Johnson/Merck. Ms. Dishart
received her Bachelor of Science degree from Lock Haven University. (Age 57)
Ms. Hendricks was appointed as an Executive Vice President in 2018 and is also our Chief
Financial Officer and Corporate Treasurer. 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 53)
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 52)
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 17 years. Mr. Shook has over 27
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 51)
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.
35
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
At February 19, 2021, ProAssurance Corporation had 3,275 stockholders of record and 53,893,267 shares of common
stock outstanding. ProAssurance’s common stock currently trades on the NYSE under the symbol “PRA.”
PART II
Quarter
First
Second
Third
Fourth
Quarter
First*
Second
Third
Fourth
2020
2019
High
$ 37.58
$ 23.31
$ 16.22
$ 18.76
Low
$ 20.27
$ 13.10
$ 13.49
$ 13.62
High
$ 45.36
$ 39.92
$ 40.67
$ 41.40
Low
$ 34.61
$ 34.71
$ 36.26
$ 35.93
Dividends Declared
Dividends Paid
2020
0.31
0.05
0.05
0.05
$
$
$
$
2019
0.31
0.31
0.31
0.31
$
$
$
$
2020
0.31
0.31
0.05
0.05
$
$
$
$
2019
0.81
0.31
0.31
0.31
$
$
$
$
* Dividends paid in 2019 included a special dividend of $0.50 per common share declared in the fourth quarter of 2018.
The Board declared a quarterly dividend in each quarter of 2020 and 2019. Each dividend was paid in the month
following the quarter in which it was declared. 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, 2020.
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)
521,762
—
(b)
$—
—
Number of securities
remaining available
for future issuance
under equity compensation
plans (excluding securities reflected
in column (a))
(c)
*
1,576,581
—
* No outstanding options as of December 31, 2020. Other outstanding share units have no exercise price.
36
Issuer Purchases of Equity Securities
Period
October 1 - 31, 2020
November 1 - 30, 2020
December 1 - 31, 2020
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.
37
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, 2020 as compared to the year ended December 31, 2019 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, 2019 as compared
to the year ended December 31, 2018, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section of ProAssurance's December 31, 2019 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 results of operations 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, liability insurance for medical technology and life sciences risks
and workers' compensation insurance. We also provide capital to Syndicate 1729 and 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. Our professional liability insurance is primarily comprised of medical professional liability products
offered to healthcare providers and institutions. We also offer, to a lesser extent, professional liability insurance 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 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. Each SPC is owned, fully or in part, by an agency, group or association, and the 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
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.
• Lloyd's Syndicates - This segment includes the results from our participation in Lloyd's of London Syndicate 1729
(29% for the 2020 underwriting year) and Syndicate 6131 (100% for the 2020 underwriting year). 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. To support and grow our core insurance
operations, we decreased our participation in the results of Syndicate 1729 for the 2021 underwriting year to 5%
from 29%. Syndicate 6131 is an SPA that underwrites on a quota share basis with Syndicate 1729. Effective July 1,
2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an unaffiliated insurer.
Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the
38
unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and we decreased our participation in the
results of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due to the quarter lag, the change in
our participation in the results of Syndicates 1729 and 6131 will not be reflected in our results until the second
quarter of 2021.
• 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 16 of the Notes to Consolidated Financial Statements,
Part I and in the Segment 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. In early 2020, we entered into a definitive agreement to acquire NORCAL, an underwriter of
medical professional liability insurance, subject to the demutualization of NORCAL Mutual, NORCAL's ultimate controlling
party. If consummated, the transaction will provide strategic and financial benefits including additional scale and geographic
diversification in the physician professional liability market. Upon satisfaction of the various remaining regulatory approvals
required, we are anticipating to close the transaction in the second quarter of 2021. See further discussion under the heading
"Acquisitions" in the Liquidity and Capital Resources and Financial Condition section that follows. We continue to see new
opportunities from each of our acquisitions and believe each will provide organic growth through expansion in their existing
markets and relationships.
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 (41% in 2020) 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, focus on state strategies to
achieve greater concentration and predictability, 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.
Our operations at Eastern, a provider of workers' compensation insurance, currently represents the second largest product
line in our gross premiums written (29% in 2020, 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.
Beginning in 2014, we started participating in and providing capital to Syndicate 1729 and beginning in 2018, began
participating in and providing capital to Syndicate 6131. Our participation in Syndicate 1729 for the 2014 through 2020
underwriting years has ranged from a low of 29% to a high of 62%. Our participation in Syndicate 6131 was 100% for the 2018
through 2020 underwriting years. Our Lloyd's Syndicates segment represents 10% of our gross premiums written in 2020. For
the 2021 underwriting year, we have decreased our participation in Syndicate 1729 (to 5% from 29%) and Syndicate 6131 (to
50% from 100%) in order to support and grow our core insurance operations, as previously discussed.
With the changes in executive leadership beginning in 2019, we have performed a detailed strategic review which led us
to make significant organizational adjustments to our operating structure which we believe will improve our ability to grow our
business profitably while strengthening our industry leading products and services. This review included consideration of the
external environment on our business, agency partners’ operations and valued customer base, with the ultimate goal of
enhancing our service platform to meet the ever-changing needs of the marketplace.
COVID-19 continues to present challenges for all in the insurance marketplace. Policyholders, agency partners and
insurance carriers are conducting business in ways never before considered, and some of these changes may persist even after
the pandemic subsides. We believe our enhanced operating structure and strategy have positioned us well to face these
challenges and support our policyholders and agency partners as we navigate the current environment.
39
We believe our emphasis on the fair treatment of our insureds and other important stakeholders through our commitment
to “Treated Fairly” has enhanced our market position and differentiated us from other insurers. We will continue to practice our
values of integrity, leadership, relationships and enthusiasm in all of our activities. We will honor these values in the execution
of “Treated Fairly” to perform our Mission and realize our Vision. We believe that as we reach more customers with this
message we will continue to improve retention and add new insureds.
Key Performance Measures
We 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 (loss) 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, 2020 was approximately 7.9%.
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.
40
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.
As a result of the COVID-19 pandemic, we are reevaluating certain of these estimates and assumptions which could result
in material changes to our results of operations including, but not limited to, higher losses and loss adjustment expenses, lower
premium volume, asset impairment charges, declines in investment valuations, reductions in audit premium estimates, deferred
tax valuation allowances and increases in the allowance for expected credit losses related to available-for-sale securities,
premiums receivable and reinsurance receivables. The extent to which the COVID-19 pandemic impacts our business, results of
operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
These factors include, but are not limited to, the duration, spread, severity, reemergence or mutation of the COVID-19
pandemic, development and wide-scale distribution of medicines or vaccines that effectively treat the virus, the effects of the
COVID-19 pandemic on our insureds, the loss environment, the healthcare industry, the labor market and Lloyd's, the actions
and stimulus measures taken by governments and governmental agencies, and to what extent normal economic and operating
conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience an impact to our business as a
result of any economic recession that has occurred or may occur in the future. Please see "Item 1A, Risk Factors" included in
this report for additional information.
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, 2020, 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,
historical paid and incurred loss development trends and our evaluation of the current loss environment including frequency,
severity, the expected effect of inflation, general economic and social trends, and the legal and political environment. We also
take into consideration 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.
41
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 2020 and 2019 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.
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 professional liability business (80% of our consolidated gross reserve for losses and loss
adjustment expenses as of December 31, 2020; predominately comprised of our HCPL products), 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 current accident year net loss ratio in the Specialty P&C segment has ranged from 87% to 106% in recent years,
excluding the effect of a single large national healthcare account that generated outsized losses and distorted results for 2019
and 2020. We recorded a higher than average current accident year net loss ratio in 2019 due to increased reserve estimates
related to this large national healthcare account that exceeded the assumptions we made when originally underwriting the
account. During the second quarter of 2020, the policy term associated with this account's claims-made coverage expired. This
account did not renew on terms offered by us and the insured exercised its contractual option to purchase the extended reporting
endorsement or "tail" coverage resulting in a net underwriting loss of $45.7 million recognized in the second quarter of 2020
associated with this policy, which increased our current accident year net loss ratio for the year ended December 31, 2020.
Excluding the impact of this large national healthcare account, the current accident year net loss ratio was 94.7% for the year
ended December 31, 2020. This reflects loss severity in the broader medical professional liability industry and a higher loss
pick in our Specialty line of business.
During 2020, we have observed a reduction in claims frequency as compared to 2019, some of which is likely associated
with the COVID-19 pandemic; however, we have remained cautious in recognizing these favorable frequency trends in our
current accident year reserve due to the long-tailed nature of our HCPL claims as well as the uncertainty surrounding the length
and severity of the pandemic. During 2020, we established a $10 million reserve related to COVID-19. This reserve represents
our best estimate of ultimate COVID-19 related losses based on currently available information and reported incidents; no
adjustment has been made to this reserve since the second quarter of 2020. See further discussion in our Segment Results -
Specialty Property & Casualty section that follows under the heading "Losses and Loss Adjustment Expenses."
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, 2020) 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 (8% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31,
2020) 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
42
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.
Similar to our Specialty P&C segment, we have also observed a reduction in claims frequency in our Workers'
Compensation Insurance segment, some of which is likely associated with the COVID-19 pandemic. During the third quarter of
2020, we reduced our current accident year net loss ratio in response to the continuation of favorable trends in 2020, including
lower claims frequency and severity, as our workers' compensation claims are shorter-tailed in nature as compared to our HCPL
claims; however, we remain cautious in our evaluation of the current accident year reserve due to uncertainty surrounding the
length and severity of the pandemic, and legislative and regulatory bodies in certain states changing or attempting to broaden
compensability requirements for COVID-19 claims. If these legislative and regulatory bodies are successful, it could have an
adverse impact on the frequency and severity related to COVID-19 claims. See previous discussion in Part I under the heading
"Insurance Regulatory Matters- COVID-19." Furthermore, as it relates to both our Workers' Compensation Insurance and
Segregated Portfolio Cell Reinsurance segments, the current economic conditions resulting from the COVID-19 pandemic have
introduced significant risk of a prolonged recession, which could have an adverse impact on our return to wellness efforts and
the ability of injured workers to return to work, resulting in a potential reduction in favorable claim trends in future periods.
Segregated Portfolio Cell Reinsurance Segment. The factors that affect the ultimate losses incurred for the workers'
compensation and HCPL 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, 2020) 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 (5% of our consolidated gross reserve for losses and loss adjustment expenses as of
December 31, 2020). 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 mix of earned premium from different open underwriting
years which we participate in to varying degrees, as well as 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.
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. We believe that the use of consulting actuaries provides an independent view of our
loss data as well as a broader perspective on industry loss trends.
For the Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the
analysis performed by the consulting actuaries analyzes each partition of our business in a variety of ways and uses multiple
actuarial methodologies in performing these analyses, including:
•
•
•
•
•
Bornhuetter-Ferguson (Paid and Reported) Method
Paid Development Method
Reported (Incurred) Development Method
Average Paid Value Method
Average Reported Value Method
A brief description of each method follows.
43
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.
Generally, methods such as the Bornhuetter-Ferguson Method are used on more recent accident years where we have less
data on which to base our analysis. As time progresses and we have an increased amount of data for a given accident year, we
begin to give more confidence to the development and average methods, as these methods typically rely more heavily on our
own historical data. These methods emphasize different aspects of loss reserve estimation and provide a variety of perspectives
for our decisions.
Certain of the methodologies utilized to estimate the ultimate losses for each partition of our reserves consider the actual
amounts paid. Paid data is particularly influential when a large portion of known claims have been closed, as is the case for
older accident years. In selecting a point estimate for each partition, management considers the extent to which trends are
emerging consistently for all partitions and known industry trends. Thus, actual, rather than estimated severity trends are given
more consideration. If actual severity trends are lower than those estimated at the time that reserves were previously
established, the recognition of favorable development is indicated. This is particularly true for older accident years where our
actuarial methodologies give more weight to actual loss costs (severity).
The various actuarial methods discussed above are applied in a consistent manner from period to period. In addition, we
perform statistical reviews of claims data such as claim counts, average settlement costs and severity trends when establishing
our reserves.
We utilize the selected point estimates of ultimate losses to develop estimates of ultimate losses recoverable from
reinsurers, based on the terms and conditions of our reinsurance agreements. An overall estimate of the amount receivable from
reinsurers is determined by combining the individual estimates. Our net reserve estimate is the gross reserve point estimate less
the estimated reinsurance recovery.
For our Workers’ Compensation Insurance segment and for the workers' compensation exposures in our Segregated
Portfolio Cell Reinsurance segment, we utilize the Reported (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
44
amortized over the average expected life of the reserve of 6 years. The fair value adjustment was 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.
Changes in economic conditions and steps taken by the federal government and the Federal Reserve in response to
COVID-19 could lead to inflation trends that are different from those we anticipated when establishing our reserves, which
could in turn lead to an increase or decrease in our loss costs and the need to strengthen or reduce reserves. These impacts of
inflation on loss costs and reserves could be more pronounced for our HCPL line of business as that business generally requires
a longer period of time to settle claims for a given accident year and, accordingly, is relatively more inflation sensitive.
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. In order to
project ultimate losses, we partition our reserves for analysis such as by line of business, geography, coverage layer or accident
year. 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 medical professional liability industry
as well as higher initial loss expectations on incurred claims. The severity trend is an explicit component of our pricing models
and directly impacts the reserving process. 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.
Due to the long-tailed nature of our claims and the previously discussed historical volatility of loss costs, selection of a
severity trend assumption is a subjective process that is inherently likely to prove inaccurate over time. Given the long tail and
volatility, we are generally cautious in making changes to the severity assumptions within our pricing models. All open claims
and accident years are generally impacted by a change in the severity trend, which compounds the effect of such a change.
Although the future degree and impact of the ultimate severity trend remains uncertain due to the long-tailed nature of our
business, we have given consideration to observed loss costs in setting our rates. For our HCPL business, this practice had
generally resulted in rate reductions as claim frequency declined and remained at historically low levels. However, from early
2017 to the current period, the average pricing on renewed business has steadily increased reflective of the rising loss cost
environment, and we anticipate further renewal pricing increases due to 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.
45
Loss Development by Line of Business
Professional Liability
Our professional liability line of business includes both our HCPL and Small Business Unit 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 2020.
The following table presents additional information about the loss development for our professional liability line of
business, excluding loss development for HCPL coverages assumed by the SPCs at Inova Re and Eastern Re:
($ in thousands)
2020
2019
2018
Accident Years
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
Prior to 2011
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2020
Reserve
Development
(favorable)
unfavorable
N/A
1,361
1,218
(2,741)
(1,760)
(4,489)
(8,930)
(133)
(1,835)
(1,965)
387
485,035
513,999 $
518,003 $
436,106 $
403,273 $
363,174 $
326,503 $
358,956 $
377,938 $
371,475 $
7,908,549 $
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
69,518
35,591
1,848
(27,495)
(17,412)
(12,799)
(9,173)
(4,343)
(17,229)
22.0 %
48.7 %
65.1 % $
77.9 % $
88.8 % $
93.7 % $
96.6 % $
98.0 % $
99.2 % $
99.2 % $
$
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
N/A
N/A
N/A
13,637
10,648
(1,268)
(16,627)
(20,398)
(13,403)
(13,940)
(22,442)
N/A
25.3 %
46.9 %
67.8 % $
82.1 % $
89.6 % $
93.9 % $
96.9 % $
98.7 % $
98.9 % $
$
% of Known
Claims
Closed
N/A
N/A
18.0 %
46.4 %
66.4 %
80.8 %
89.4 %
94.7 %
97.4 %
97.8 %
During 2020, we have also observed a significant reduction in claims frequency as compared to 2019, some of which is
likely associated with the COVID-19 pandemic and the disruption of the court systems; however, we have remained cautious in
recognizing these favorable frequency trends in our current accident year reserve due to the long-tailed nature of HCPL claims
as well as the uncertainty surrounding the length and severity of the pandemic. Development recognized during 2020
principally related to accident years 2014 through 2017. Not included in the above table, as previously discussed, is
$4.4 million of favorable development recognized during 2020 in our Segregated Portfolio Cell Reinsurance segment related to
the HCPL coverages assumed by the SPCs at Inova Re and Eastern Re. During 2019 the loss experience in our Specialty line of
business deteriorated further, particularly in regard to the reserves we established for a large national healthcare account, as
previously discussed. This deterioration is the primary driver of the unfavorable development we recognized in 2019 for
accident years 2016 through 2018. During the year ended December 31, 2018, reflection of higher severity trends in the
Specialty line of business also resulted in increases of estimated ultimate losses for open claims for earlier accident years, which
resulted in a lower amount of favorable development recognized in 2018 as compared to earlier years.
This can also be seen in looking at both the absolute amount of reserve development recognized for the less developed
accident years as well as the size of such development when compared to established ultimates for those same accident years at
the end of the preceding calendar year. The following table provides this information for years ended December 31, 2020, 2019
and 2018 with respect to the three then most recent prior accident years:
($ in millions)
Prior accident years
Net favorable (unfavorable) development
recognized for the specified years
Development as a % of established ultimates,
prior calendar year end
2020
2017-2019
2019
2016-2018
2018
2015-2017
$
0.2
$
(107.0)
$
(23.0)
—%
(8.5%)
(2.0%)
46
Medical Technology Liability
Our Medical Technology Liability line of business has not experienced the change in claims 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)
2020
2019
2018
Accident Years
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
Prior to 2011
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2020
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
$
$
$
$
$
$
$
$
$
$
$
14,737
N/A
12,862 $
(1,047)
41.0 %
41.8 %
N/A
N/A
11,897 $
(352)
75.2 % $
(1,856)
N/A
13.4 %
68.2 %
8,209 $
(3,854)
90.1 % $
(2,166)
85.6 % $
N/A
N/A
N/A
(695)
10,737 $
8,620 $
9,691 $
4,727 $
8,435 $
8,887 $
(486)
(663)
(458)
(294)
(69)
(254)
96.7 % $
(1,249)
65.9 % $
(1,114)
96.3 % $
(1,548)
85.8 % $
(1,511)
98.9 % $
(1,823)
94.3 % $
(1,526)
100.0 % $
(291)
98.7 % $
(1,526)
99.2 % $
(1,362)
99.2 % $
585
99.8 % $
(467)
99.6 % $
(5,273)
576,288 $
(1,116)
$
(2,003)
$
(2,231)
N/A
N/A
52.4 %
72.2 %
62.8 %
64.6 %
93.2 %
98.7 %
98.8 %
99.8 %
Approximately $5.3 million of the $8.6 million total net favorable development recognized in 2020 related to the 2017
through 2019 accident years. The development for the 2017 through 2019 accident years represents a 13.7% reduction to the
ultimates established for those reserves at December 31, 2019. Approximately $6.8 million of the $12.8 million total net
favorable development recognized in 2019 related to the 2014 through 2017 accident years. The development for the 2014
through 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 $13.3 million total net favorable development recognized in 2018 related to the 2013 through
2016 accident years. The development for the 2013 through 2016 accident years represents a 12.3% reduction to the ultimates
established for those reserves at December 31, 2017.
In 2020, 2019 and 2018 the development was largely attributable to favorable results from claims closed during the year.
As time has elapsed we have recognized that actual loss experience has on average been better than estimated. We have been
cautious in recognizing the improvement, but as claims have matured and claims are closed or have become more certain for the
remaining open claims, we have revised reserve estimates. We believe the need for a cautious approach is required as outcomes
are uncertain and results can be significantly affected by outcomes for a small number of cases.
47
Workers' Compensation
Claims in our workers’ compensation line of business have historically closed at a faster rate than in our HCPL or
Medical Technology Liability lines of business. This faster disposition rate, along with a lower net retention after the
application of reinsurance, has resulted in less volatility in loss estimates on a net basis. However, a change in the number of
individually-severe claims can create volatility in a given accident year. The following table presents additional information
about the loss development for our workers' compensation line of business:
($ in thousands)
2020
2019
2018
Accident Years
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
Prior to 2011
$
$
$
$
$
$
$
$
$
$
$
Estimated Ultimate
Losses, Net of
Reinsurance,
December 31, 2020
Reserve
Development
(favorable)
unfavorable
N/A
(6,160)
584
(3,372)
(3,048)
(3,919)
(2,136)
(592)
(126)
(312)
(91)
146,240
162,096 $
161,065 $
131,909 $
111,863 $
119,330 $
118,812 $
115,106 $
94,678 $
90,657 $
473,326 $
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
Reserve
Development
(favorable)
unfavorable
% of Known
Claims
Closed
41.6 %
81.6 %
91.7 % $
96.0 % $
97.1 % $
98.0 % $
98.9 % $
99.5 % $
99.7 % $
99.6 % $
$
N/A
N/A
(2,561)
(4,349)
(8,923)
(2,128)
(363)
2,405
(72)
(134)
(265)
N/A
43.0 %
81.8 %
91.4 % $
95.2 % $
96.9 % $
98.9 % $
99.4 % $
99.7 % $
99.5 % $
$
N/A
N/A
N/A
(4,203)
(8,257)
(1,998)
(92)
(227)
(565)
(60)
(65)
N/A
N/A
40.0%
80.8 %
91.8 %
95.3 %
98.4 %
99.2 %
99.5 %
99.3 %
In 2020, we recognized $12.1 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment
related to workers' compensation business and $7.0 million of net favorable development in our Workers' Compensation
Insurance segment. In 2019, we recognized $10.1 million of net favorable development in our Segregated Portfolio Cell
Reinsurance segment, all related to workers' compensation business, 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, all related to workers' compensation business, and $8.0 million of net favorable
development in our Workers' Compensation Insurance segment. During the years ended December 31, 2019 and 2018, 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
Carried Net Reserve
High End Point
$1.540 billion
$2.032 billion
$2.615 billion
$1.668 billion
$2.032 billion
$2.357 billion
Any change in our estimate of net ultimate losses for prior years is reflected in net income (loss) 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 2020, 2019 and 2018.
48
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 exposures 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. As of December 31, 2020, 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 $51 million or more. 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, 2020, 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 minimums and maximums. Any adjustments to our estimates of losses recoverable
under our reinsurance agreements or the premiums owed under our agreements are reflected in 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.
Our reinsurance receivables are exposed to credit losses but to-date have not experienced any significant amount of
credit losses. To partially mitigate our exposure to credit losses, reinsurance receivables totaling approximately $96.1 million
were collateralized by letters of credit or funds withheld as of December 31, 2020. We measure expected credit losses on our
reinsurance receivables on a collective basis when similar risk characteristics exist or on an individual basis if we determine a
receivable does not share similar risk characteristics. We measure expected credit losses associated with our reinsurance
receivables (related to both paid and unpaid losses) at the consolidated level as our reinsurance receivables share similar risk
characteristics including type of financial asset, type of industry and similar historical and expected credit loss patterns. We
measure expected credit losses over the average contractual term of our reinsurance receivables utilizing a loss rate method.
Historical internal credit loss experience is the basis for our assessment of expected credit losses; however, we may also
consider historical credit loss information from external sources. We also consider reasonable and supportable forecasts of
future economic conditions in our estimate of expected credit losses. Expected credit losses associated with our reinsurance
receivables (related to both paid and unpaid losses) were nominal in amount as of December 31, 2020. We had no allowance for
expected credit losses related to our reinsurance receivables at December 31, 2019. No reinsurance balances were written off
for credit reasons during the years ended December 31, 2020 or 2019. Should our expected credit loss analysis or other facts or
circumstances lead us to believe that any reinsurer may not meet its obligations to us, adjustments to the allowance for expected
credit losses or to reinsurance receivables would be reflected in 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. For further information on our allowance for expected credit
losses related to our receivables from reinsurers see Note 1 of the Notes to Consolidated Financial Statements.
49
Investment Valuations
We record the majority of our investments at fair value as shown in the table below. At December 31, 2020, 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
12%
76%
1%
7%
96%
4%
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 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.
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.
50
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. During the third quarter of 2020, we recognized a nonrecurring fair
value measurement related to the goodwill in our Specialty P&C reporting unit with a carrying value of $161.1 million prior to
the fair value measurement. This nonrecurring fair value measurement resulted in the goodwill being written down to its
implied fair value of zero resulting in an impairment of the goodwill of $161.1 million (see following discussion under the
heading "Goodwill / Intangibles"). The inputs used in the fair value measurement were non-observable and, as such, were
categorized as a Level 3 valuation. We did not have any other assets or liabilities that were measured at fair value on a
nonrecurring basis at December 31, 2020 or December 31, 2019.
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, 2020, these investments represented approximately 4% 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
$
3.0
Principally Cost
Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships
Equity method investments, primarily LPs/LLCs
BOLI
27.7
49.1
76.8
67.8
Equity
Equity
Cash surrender value
Total investments - Other valuation methodologies
$
147.6
Impairments
We evaluate our available-for-sale investment securities, which at December 31, 2020 and December 31, 2019 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 an impairment loss. We consider a credit-related impairment loss 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 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:
The estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing
whether further principal and interest will be received. We consider various factors in projecting recovery values and recovery
time frames, including the following:
• third-party research and credit rating reports;
• the current credit standing of the issuer, including credit rating downgrades, whether before or after the balance
sheet date;
• the extent to which the decline in fair value is attributable to credit risk specifically associated with the security or its
issuer;
51
• 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;
• recoveries or additional declines in fair value subsequent to the balance sheet date;
• adverse legal or regulatory events;
• significant deterioration in the market environment that may affect the value of collateral (e.g. decline in real estate
prices);
• significant deterioration in economic conditions; and
• disruption in the business model resulting from changes in technology or new entrants to the industry.
If deemed appropriate and necessary, a discounted cash flow analysis is performed to confirm whether a credit loss exists
and, if so, the amount of the credit loss. We use the single best estimate approach for available-for-sale debt securities and
consider all reasonably available data points, including industry analyses, credit ratings, expected defaults and the remaining
payment terms of the debt security. For fixed rate available-for-sale debt securities, cash flows are discounted at the security's
effective interest rate implicit in the security at the date of acquisition. If the available-for-sale debt security’s contractual
interest rate varies based on subsequent changes in an independent factor, such as an index or rate, for example, the prime rate,
the LIBOR, or the U.S. Treasury bill weekly average, that security’s effective interest rate is calculated based on the factor as it
changes over the life of the security. If we intend to sell a debt security or believe we will more likely than not be required to
sell a debt security before the amortized cost basis is recovered, any existing allowance will be written off against the security's
amortized cost basis, with any remaining difference between the debt security's amortized cost basis and fair value recognized
as an impairment loss in earnings.
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, impairment for debt securities is separated into a credit
component and a non-credit component. The credit component of an impairment 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. An allowance for expected
credit losses will be recorded for the expected credit losses through income and the non-credit component is recognized in OCI.
The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the available-for-sale
debt security.
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
component of the reserve for losses on our Consolidated Balance Sheet. For the year ended December 31, 2020 we did not
determine any DPAC to be unrecoverable. 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. The $9.2 million PDR was fully amortized during 2020. See further discussion on
the PDR in the Segment Results - Specialty Property & Casualty section that follows.
52
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, tax credit carryforwards,
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 of the appropriate character (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. In addition, a valuation allowance was established in 2020 against a portion of the deferred tax asset
related to the U.S. state NOL carryforwards. Management concluded that it was more likely than not that these deferred tax
assets will not be realized. We also established a valuation allowance in a prior year against the deferred tax assets of certain
SPCs at our wholly owned Cayman Islands reinsurance subsidiary, Inova Re. Due to the limited operations of these SPCs,
management concluded that a valuation allowance was required. As of December 31, 2020, 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 5 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 have elected 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 during the
years ended December 31, 2020 or December 31, 2019. See further discussion on our Cayman Islands SPC operations in the
Segment Results - Segregated Portfolio Cell Reinsurance section that follows. See discussion in Note 5 of the Notes to
Consolidated Financial Statements.
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 the inclusion 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 each of the years ended December 31, 2020 and December 31, 2019. See discussion in Note 5 of
the Notes to Consolidated Financial Statements.
Coronavirus Aid, Relief and Economic Security Act
In response to COVID-19, the CARES Act was signed into law on March 27, 2020 and contains several provisions for
corporations and eases certain deduction limitations originally imposed by the TCJA. The CARES Act, among other things,
includes temporary changes regarding the prior and future utilization of NOLs, temporary changes to the prior and future
limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social
Security taxes and the creation of certain refundable employee retention credits. We anticipate the temporary changes regarding
NOL carryback provisions will have a favorable impact on our liquidity (see discussion that follows in the Liquidity and
Capital Resources and Financial Condition section under the heading "Taxes"). We have evaluated the other provisions of the
CARES Act and concluded that they will not have a material impact on our financial position or results of operations. See
discussion in Note 5 of the Notes to Consolidated Financial Statements.
53
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
quarter, considering changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and
developments in case law, and make adjustments as we consider necessary. Adjustments to our unrecognized tax benefits may
affect our income tax expense, and settlement of uncertain tax positions may require the use of cash. Other than differences
related to timing, no significant adjustments were considered necessary during 2020 or 2019. At December 31, 2020, our
liability for unrecognized tax benefits approximated $5.2 million.
Goodwill / Intangibles
Goodwill is tested for impairment annually or more frequently if circumstances indicate an impairment may have
occurred. The date of our annual goodwill impairment testing is October 1.
Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in
Note 16 of the Notes to Consolidated Financial Statements.
During the third quarter of 2020, the Company recorded a goodwill impairment charge of $161.1 million, and the facts
and circumstances that led to this impairment and how the fair value of each reporting unit was estimated, including the
significant assumptions used and other details are outlined in the following section.
Interim Impairment Assessments
As disclosed in our June 30, 2020 report on Form 10-Q, COVID-19 has caused significant market volatility impacting our
actual and projected results along with a decline in our stock price; and we performed a quantitative assessment on the Specialty
P&C and Workers' Compensation Insurance reporting units. As a result of the interim goodwill impairment assessment in the
second quarter of 2020, management concluded that the fair value of each of the Specialty P&C and Workers' Compensation
Insurance reporting units were greater than their carrying value as of the testing date; therefore, goodwill was not impaired and
no further impairment testing was required at that time.
As the impacts persisted into the third quarter, management performed new quantitative assessments of goodwill on our
Specialty P&C and Workers' Compensation Insurance reporting units using updated marketplace data. The updated data, which
was significantly influenced by our continued depressed stock price relative to both our own book value and the comparable
stock prices of our peers, impacted a number of key variables in our analysis including the determination of a higher discount
rate and lower valuation multiples. In addition, new guidance given by the Federal Reserve during the period regarding the
expectation of a prolonged low interest rate environment impacted our analysis. This analysis during the third quarter of 2020
indicated an impairment of the goodwill associated with our Specialty P&C reporting unit and accordingly we recorded a
$161.1 million charge to goodwill during the third quarter of 2020.
For each of the interim impairment assessments performed in the second and third quarters of 2020, management
estimated the fair value of the reporting units using both an income approach and a market approach using marketplace data that
was current at the time of each respective analysis. The estimate of fair value derived from the income approach was 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 was based on
price to book multiple data. The determination of fair value involved the use of significant estimates and assumptions, including
revenue growth rates, operating margins, capital requirements, tax rates, terminal growth rates, discount rates, comparable
public companies and synergistic benefits available to market participants. In addition, management made certain judgments
and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each
reporting unit.
Management also performed impairment tests of certain of our definite and indefinite lived intangible assets for which a
triggering event was deemed to have occurred. Based upon these impairment tests, no impairment of our definite or indefinite
lived intangible assets was identified at September 30, 2020.
Annual Impairment Assessment
Subsequent to performing the interim impairment assessments previously discussed, we performed our annual goodwill
impairment assessment as of October 1, 2020.
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 a quantitative impairment test; otherwise,
54
no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the
quantitative impairment test.
Performance of the qualitative goodwill impairment assessment requires judgment in identifying and considering the
significance of relevant key factors, events, and circumstances that affect the fair values of our reporting units. This requires
consideration and assessment of external factors such as macroeconomic, industry, and market conditions, as well as entity-
specific factors, such as our actual and planned financial performance. We also give consideration to the difference between
each reporting unit's fair value and carrying value as of the most recent date that a fair value measurement was performed. If the
results of the qualitative assessment conclude that it is not more likely than not that the fair value of a reporting unit exceeds its
carrying value, additional quantitative impairment testing is performed.
The quantitative goodwill impairment test involves comparing the fair value of a reporting unit with its carrying value
including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not
to be impaired. However, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded in an
amount equal to that excess. Any impairment charge recognized is limited to the amount of the respective reporting unit's
allocated goodwill.
Determining the fair value of a reporting unit under the quantitative goodwill impairment test requires judgment and often
involves the use of significant estimates and assumptions, including an assessment of external factors such as macroeconomic,
industry, and market conditions, as well as entity-specific factors, such as actual and planned financial performance. These
estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the
magnitude of any such charge. To assist management in the process of determining any potential goodwill impairment, we may
review and consider appraisals from accredited independent valuation firms. Estimates of fair value are primarily determined
using discounted cash flows and market comparisons. These approaches involve significant estimates and assumptions,
including projected future cash flows (including timing), discount rates reflecting the risks inherent in those future cash flows,
perpetual growth rates, and selection of appropriate market comparable metrics and transactions.
For the most recent goodwill impairment test performed on October 1, 2020, we elected to perform a qualitative goodwill
impairment test for our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units. 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 two reporting units that have net 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 during the years ended December 31, 2019 or 2018. See Note 6 of the Notes to Consolidated Financial Statements for
additional information about our goodwill.
Leases
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, 2020, 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 on January 1, 2019, 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
55
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 as of the balance sheet date. We include changes to the EBUB estimate in net premiums written and earned in
the period recognized. We reduced our EBUB estimate by $1.3 million during the year ended December 31, 2020 which
primarily reflected a reduction in earned payroll exposure. As a result of the economic impact of COVID-19, we expect future
reductions in payroll exposure related to in-force policies that could result in a significant decrease in audit premium and our
EBUB estimate. We will continue to monitor and adjust the estimate, if necessary, based on changes in insured payrolls and
economic conditions, as experience develops or new information becomes known; however, the length and magnitude of such
changes depends on future developments, which are highly uncertain and cannot be predicted.
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
During the second quarter of 2020, we early adopted ASU 2019-12 which is intended to simplify various aspects related
to accounting for income taxes. The most impactful provision of the new guidance on the Company is the removal of the
limitation on the tax benefit recognized on pre-tax losses during interim periods in which the year-to-date loss exceeds the
expected loss for the fiscal year.
We did not have any other change in accounting estimate or policy that had a material effect on our results of operations
or financial position during 2020. We are not aware of any accounting changes not yet adopted as of December 31, 2020 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.
56
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 another 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, 2020, we held cash and liquid investments of approximately $260 million outside our
insurance subsidiaries that were available for use without regulatory approval or other restriction. We also have $250 million in
permitted borrowings available under our Revolving Credit Agreement as well as the possibility of a $50 million accordion
feature if successfully subscribed. As of February 19, 2021, no borrowings were outstanding under our Revolving Credit
Agreement.
During 2020, our operating subsidiaries paid dividends to us of approximately $118 million, which included extraordinary
dividends of approximately $64 million. In the aggregate, our insurance subsidiaries are permitted to pay dividends of
approximately $87 million over the course of 2021 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)
2020
2019
Change
Year Ended December 31
Net cash provided (used) by:
Operating activities
Investing activities
Financing activities
$
92,343 $ 148,166 $
(55,823)
(8,484)
50,522
(59,006)
(43,446)
(103,790)
60,344
Increase (decrease) in cash and cash equivalents
$
40,413 $
94,898 $
(54,485)
(In thousands)
2019
2018
Change
Year Ended December 31
Net cash provided (used) by:
Operating activities
Investing activities
Financing activities
$ 148,166 $ 177,265 $
(29,099)
50,522
(103,790)
214,897
(446,186)
(164,375)
342,396
Increase (decrease) in cash and cash equivalents
$
94,898 $
(54,024) $ 148,922
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 2020 as compared to 2019 of $55.8 million was primarily due to an increase in
paid losses of $89.1 million driven by our Specialty P&C and Segregated Portfolio Cell Reinsurance segments. The increase in
paid losses in our Specialty P&C segment was primarily due to higher average claim payments which we believe is an
indication that the higher severity trends that we are experiencing in our HCPL case reserve estimates are emerging in actual
claim payments. The increase in paid losses in our Segregated Portfolio Cell Reinsurance segment reflected the payment of a
$10 million claim during the first quarter of 2020 by an SPC at Eastern Re in which we do not participate. The payment related
to a reserve established by the SPC in 2019 related to an errors and omissions liability policy. Furthermore, the decrease in
operating cash flows reflected a decrease in net cash received of $7.4 million associated with the cash settlement of the 2017
calendar year quota share reinsurance agreement between our Specialty P&C segment and Syndicate 1729 due to the reduction
57
in premiums ceded to Syndicate 1729. The decrease in operating cash flows also reflected one-time expenses of $5.4 million
primarily related to employee severance and early retirement benefits paid to certain employees in 2020. Additionally, the
decrease in operating cash flows reflected a decrease in cash received from investment income of $3.5 million primarily due to
a reduction in dividends received on our equity portfolio resulting from a decrease in our allocation to this asset category. The
decrease in operating cash flows was somewhat offset by an increase in net premium receipts of $28.1 million and a decrease in
2020 net tax payments as compared to 2019 of $9.8 million. The increase in net premium receipts was driven by our Specialty
P&C segment due to $14.3 million of tail premium received from a large national healthcare account during the second quarter
of 2020 (see further discussion in our Segment Results - Specialty Property & Casualty section that follows). The decrease in
net tax payments was primarily due to refunds received in 2020. Furthermore, the decrease in operating cash flows was partially
offset by an increase in net cash received of $6.8 million associated with the cash settlement of a quota share reinsurance
agreement between our Specialty P&C segment and one of its reinsurers. The remaining variance in operating cash flows in
2020 as compared to 2019 was comprised of individually insignificant components.
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
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 agreements 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.
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 the heading "Financing
Activities and Related Cash Flows."
58
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.
59
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Table Notes
•
•
•
•
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 claims 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 claims 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 Specialty line 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 Specialty
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 Results - Specialty
Property and Casualty section that follows.
61
Activity in our net reserve for losses during 2020, 2019 and 2018 is summarized below:
Balance, beginning of year
$
2,346,526 $
2,119,847 $
2,048,381
(In thousands)
2020
2019
2018
Year Ended December 31
Less reinsurance recoverables on unpaid losses and
loss adjustment expenses
Net balance, beginning of year
Net losses:
Current year(1)(2)(3)
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
390,708
1,955,818
343,820
1,776,027
335,585
1,712,796
711,846
765,698
685,326
(50,399)
661,447
(83,204)
(501,969)
(585,173)
(11,783)
753,915
(115,133)
(458,991)
(574,124)
(92,116)
593,210
(117,268)
(412,711)
(529,979)
2,032,092
1,955,818
1,776,027
adjustment expenses
Balance, end of year
385,087
390,708
343,820
$
2,417,179 $
2,346,526 $
2,119,847
(1) Current year net losses for the year ended December 31, 2019 included incurred losses of $2.1 million related to a loss
portfolio transfer entered into during 2019 in the Specialty P&C segment. 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 8 of the
Notes to Consolidated Financial Statements).
(2) Current year net losses for the year ended December 31, 2019 included a PDR of $9.2 million associated with the unearned
premium of a large national healthcare account's claims-made policy in the Specialty P&C segment. Current year net losses for
the year ended December 31, 2020 included the amortization of the aforementioned $9.2 million PDR which offsets the impact
of the losses incurred associated with the premium earned related to the large national healthcare account's claims-made policy.
For additional information regarding the PDR see Note 7 of the Notes to Consolidated Financial Statements.
(3) During 2020, the aforementioned large national healthcare account did not renew on terms offered by us and exercised its
contractual option to purchase extended reporting endorsement or "tail" coverage. As a result, we recognized total current year
losses of $60.0 million (assumes a full limit loss) within the Specialty P&C segment for the year ended December 31, 2020
(see Note 8 of the Notes to Consolidated Financial Statements).
At December 31, 2020 our gross reserve for losses included case reserves of approximately $1.4 billion and IBNR
reserves of approximately $1.0 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.
62
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 for one
program. For the years ended December 31, 2020 and 2019, we wrote total alternative market premium of approximately $76.6
million and $90.0 million, respectively. The majority of these policies ($72.8 million and $86.7 million of premium in 2020 and
2019, 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 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 results attributable 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 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 healthcare 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 $2.8 million and $2.4 million in 2020 and 2019,
respectively, was 100% ceded to an unaffiliated captive insurer.
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. Generally, these agreements are negotiated and renewed annually. Our HCPL treaty renews annually
on October 1 and, for the October 1, 2020 renewal, we increased our retention to $2 million from $1 million and added
provisions for reinstatement premiums which resulted in a reduction to the gross rate paid under the renewed treaty.
Historically, our Medical Technology Liability treaty renewed annually on January 1; however, the treaty that renewed on
January 1, 2020 renewed on a short-term basis and was renewed again for a full year term on October 1, 2020 along with our
HCPL treaty. Our Medical Technology Liability treaty which renewed on October 1, 2020 renewed at a lower rate than the
previous agreement, with an increase in retention to $2 million from $1 million. Our Workers' Compensation treaty renews
annually on May 1. Our traditional workers' compensation treaty renewed May 1, 2020 at a higher rate than the previous
agreement, with an increase in the AAD to 3.16% from 2.1% of subject earned premium, in excess of the $0.5 million retention
per loss occurrence; all other material treaty terms were consistent with the expiring agreement. The significant coverages
provided by our current excess of loss reinsurance agreements are detailed in the following table.
63
Excess of Loss Reinsurance Agreements
Healthcare
Professional Liability
Medical Technology &
Life Sciences Products
Workers'
Compensation - Traditional
(1) Effective October 1, 2020, one prepaid limit reinstatement of $21M and a second limit reinstatement
of up to $21M for the second layer, subject to reinstatement premium, which attaches after the first
reinstatement has been completely exhausted. All limit reinstatements thereafter require no additional
premium.
(2) Prior to October 1, 2020, retention has been $1M.
(3) Historically, retention has ranged from 5% to 32.5%.
(4) Historically, retention has ranged from $1M to $2M.
(5) Includes an AAD where retention is 3.16% of subject earned premium in annual losses otherwise
recoverable in excess of the $500K retention per loss occurrence.
Large HCPL 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 $2 million of losses for certain large healthcare systems and other insurance entities, as well
as with certain insurance agencies that produce business for us.
64
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.
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 to
us, typically in the form of a letter of credit, 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.
65
• 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. For the second half of 2020, external quota share
reinsurance was utilized by Syndicate 6131 to manage the net loss exposure on the specialty property and
contingency coverages it assumed from Syndicate 1729 by ceding essentially half of the premium assumed to an
unaffiliated insurer; this agreement was non-renewed on January 1, 2021 (see further discussion in the Segment
Results - Lloyd's Syndicates section that follows).
Syndicate 1729 may still be exposed to losses that exceed the level of reinsurance purchased as well as to reinstatement
premiums triggered by losses exceeding specified levels. Cash demands on Syndicate 1729 can vary significantly depending on
the nature and intensity of a loss event. For significant reinsured catastrophe losses, the inability or unwillingness of the
reinsurer to make timely payments under the terms of the reinsurance agreement could have an adverse effect on Syndicate
1729's liquidity.
Taxes
We are subject to the tax laws and regulations of the U.S., Cayman Islands and U.K. We file a consolidated U.S. federal
income tax return that includes the parent company and its U.S. subsidiaries. Our filing obligations include a requirement to
make quarterly payments of estimated taxes to the IRS using the corporate tax rate effective for the tax year. We did not make
any quarterly estimated tax payments during the year ended December 31, 2020.
As a result of the CARES Act that was signed into law on March 27, 2020, as previously discussed, we now have the
ability to carryback NOLs generated in tax years 2018, 2019 and 2020 for up to five years. We have an NOL of approximately
$45.3 million from the 2020 tax year that will be carried back to the 2015 tax year and is expected to generate a tax refund of
approximately $15.9 million. Additionally, we had an NOL of approximately $25.6 million from the 2019 tax year which was
carried back to the 2014 tax year and generated a tax refund of approximately $9.0 million which we received in February
2021. Furthermore, our effective tax rate for the year ended December 31, 2020 was affected by the tax rate differential on the
carryback of the 2020 and 2019 NOLs to the 2015 and 2014 tax years, respectively, when the federal statutory tax rate was 35%
as compared to the current tax rate of 21%. See further discussion on our effective tax rate for the year ended December 31,
2020 in the Segment Results - Corporate section that follows under the heading "Taxes." We have evaluated the other
provisions of the CARES Act and concluded that they will not have a material impact on our financial position or results of
operations. See further discussion in Note 5 of the Notes to Consolidated Financial Statements.
Litigation
We are involved in various legal actions related to insurance policies and claims handling including, but not limited to,
claims asserted against us by policyholders. These types of legal actions arise in the ordinary course of business and, in
accordance with GAAP for insurance entities, are generally considered as a part of our loss reserving process, which is
described in detail in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment
Expenses." We also have other direct actions against the Company unrelated to our claims activity which we evaluate and
account for as a part of our other liabilities. For these corporate legal actions, we evaluate each case separately and establish
what we believe is an appropriate reserve based on GAAP guidance related to contingent liabilities. As of December 31, 2020
there were no material reserves established for corporate legal actions.
66
Investing Activities and Related Cash Flows
Our investments at December 31, 2020 and December 31, 2019 are comprised as follows:
($ in thousands)
Fixed maturities, available for sale:
December 31, 2020
December 31, 2019
Carrying
Value
% of Total
Investment
Carrying
Value
% of Total
Investment
U.S. Treasury obligations
$ 107,059
3 % $ 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
12,261
332,920
1 %
10 %
17,340
296,093
1,329,342
39 % 1,340,364
276,541
126,402
273,006
8 %
4 %
8 %
208,408
80,089
236,024
Total fixed maturities, available-for-sale
2,457,531
73 % 2,288,785
Fixed maturities, trading
Total fixed maturities
Equity investments
Short-term investments
BOLI
Investment in unconsolidated subsidiaries
Other investments
Total investments
48,456
1 %
47,284
2,505,987
74 % 2,336,069
120,101
337,813
67,847
310,529
47,068
4 %
10 %
2 %
9 %
1 %
250,552
339,907
66,112
358,820
38,949
$ 3,389,345
100 % $ 3,390,409
100 %
3 %
1 %
9 %
40 %
6 %
2 %
7 %
68 %
1 %
69 %
7 %
10 %
2 %
11 %
1 %
At December 31, 2020, 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, 2020
December 31, 2019
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
$ 717,187
29 % $ 677,554
30 %
103,996
168,452
122,733
197,274
323,044
245,464
189,971
190,385
59,847
133,607
5,571
4 %
7 %
5 %
8 %
13 %
10 %
8 %
8 %
2 %
5 %
1 %
84,991
152,118
153,377
182,966
338,697
171,553
182,041
155,935
52,523
130,929
6,101
3 %
7 %
7 %
8 %
15 %
7 %
8 %
7 %
2 %
5 %
1 %
$ 2,457,531
100 % $ 2,288,785
100 %
*Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright ©2021, S&P Global Market
Intelligence
67
A detailed listing of our investment holdings as of December 31, 2020 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. During the year ended December 31, 2020, we received and
granted requests for premium relief for certain insureds that have been adversely impacted by the recent COVID-19 pandemic
in the form of either premium credits or premium deferrals. While premium credits and deferrals granted during the year ended
December 31, 2020 did not have a significant impact on our liquidity, additional premium relief efforts could have an impact on
our cash flows to be generated from our operations in future quarters and could result in an increase to our allowance for
expected credit losses related to our premiums receivable. In addition to the interest and dividends we will receive from our
investments, we anticipate that between $50 million and $110 million of our portfolio 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 with consideration to current and anticipated industry trends and macroeconomic conditions,
including the impacts of COVID-19. 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. Permitted borrowings under our Revolving Credit Agreement are $250 million with the possibility of an additional $50
million accordion feature, if successfully subscribed. 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, 2020, our FAL was comprised of fixed maturity securities with a fair value of $95.0 million and cash
and cash equivalents of $11.2 million deposited with Lloyd's. See further discussion in Note 3 of the Notes to Consolidated
Financial Statements. During the third quarter of 2020, we received a return of approximately $32.3 million of FAL given the
reduction in our participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%.
Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately
94% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average
effective duration of our fixed maturity securities at December 31, 2020 was 3.16 years; the weighted average effective duration
of our fixed maturity securities combined with our short-term securities was 2.78 years.
The carrying value and unfunded commitments for certain of our investments were as follows:
($ in thousands, except expected funding period)
December 31, 2020 December 31, 2019
Unfunded
Commitment
Expected funding
period in years
Carrying Value
December 31, 2020
Qualified affordable housing project tax credit
partnerships (1)
Historic tax credit partnership (2)
All other investments, primarily investment fund
LPs/LLCs
Total
$
27,719 $
46,421 $
—
2,085
744
—
282,810
310,529 $
310,314
358,820 $
120,955
121,699
$
6
—
3
(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, 2020, we had investments in 31 separate
investment funds with a total carrying value of $282.8 million which represented approximately 8% of our total investments.
Our investment fund LPs/LLCs generate earnings from trading portfolios, secured debt, debt securities, multi-strategy funds
and private equity investments, and the performance of these 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, typically following the end of a reporting period.
68
Acquisitions
We have entered into a definitive agreement to acquire NORCAL, an underwriter of medical professional liability
insurance, subject to the demutualization of NORCAL Mutual, NORCAL's ultimate controlling party. Upon satisfaction of the
various remaining regulatory approvals required, we are anticipating to close the transaction in the second quarter of 2021.
Subject to NORCAL’s conversion from a mutual company to a stock company, we have agreed to acquire 100% of the
converted company stock in exchange for base consideration of $450 million and contingent consideration of up to an
additional $150 million depending on the development of NORCAL’s ultimate losses over a three-year period following the
acquisition date. The actual final cost of the transaction could vary due to the ability of NORCAL’s policyholders to elect forms
of consideration other than stock in the demutualization transaction as provided by California law. Those alternative
consideration options are tied to an appraised value of NORCAL as determined by the California insurance regulator rather than
the price per share we have agreed to pay for 100% of NORCAL assuming that all policyholders elect to receive stock. Further,
the transaction is subject to a number of closing conditions, including a maximum threshold for one of the alternative forms of
consideration in the demutualization, a minimum threshold for the number of NORCAL shares tendered to us, and various
required regulatory approvals, as previously mentioned. The Agreement and Plan of Acquisition is included as Exhibit 10.19 of
this report. We plan to utilize our Revolving Credit Agreement to partially finance the acquisition (see further discussion on our
Revolving Credit Agreement in this section under the heading "Debt"). The COVID-19 pandemic’s potential disruption to our
business operations may require us to access our Revolving Credit Agreement for other purposes including working capital,
capital expenditures or other general corporate requirements. If needed, we may be required to obtain additional financing and
our ability to arrange such financing or refinancing will depend on, among other factors, our financial position and
performance, as well as prevailing market conditions and other factors beyond our control. As a result, we may be compelled to
take additional measures to preserve our cash flow, including the reduction of operating expenses or reduction or suspension of
dividend payments, at least until the impacts of the COVID-19 pandemic improve. We believe that funds available under the
Revolving Credit Agreement, along with cash generated from our operations and investment portfolio, will be sufficient to meet
our liquidity needs.
Business Combinations and Ventures
There were no business combinations during the years ended December 31, 2020 or 2019.
Financing Activities and Related Cash Flows
Treasury Shares
Treasury share activity for 2020, 2019 and 2018 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
Treasury shares at the end of the period
2020
2019
2018
9,325
9,352
9,368
—
9,325
(27)
9,325
(16)
9,352
We did not repurchase any common shares subsequent to December 31, 2020 and as of February 19, 2021 our remaining
Board authorization was approximately $110 million.
69
ProAssurance Shareholder Dividends
Our Board declared cash dividends during 2020, 2019 and 2018 as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fourth Quarter - Special dividend
Quarterly Cash Dividends Declared, per Share
2020
2019
2018
$
$
$
$
$
0.31 $
0.05 $
0.05 $
0.05 $
— $
0.31 $
0.31 $
0.31 $
0.31 $
— $
0.31
0.31
0.31
0.31
0.50
Each dividend was paid in the month following the quarter in which it was declared. Cash dividends totaling $39 million,
$93 million and $316 million were paid during the years ended December 31, 2020, 2019 and 2018, respectively. Given our
current earnings profile, the effects that underlying conditions in the broader insurance marketplace continue to have on our
results and the uncertainties introduced by the COVID-19 pandemic, our Board made the decision to reduce our quarterly cash
dividend from $0.31 per share to $0.05 per share, beginning with the dividend that was declared during the second quarter of
2020. Any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of
financial performance, future expectations and other factors deemed relevant by the Board.
Debt
At December 31, 2020, 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 expires in November 2024, that 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, such as the planned acquisition of NORCAL, as previously discussed under the heading "Acquisitions." Our
Revolving Credit Agreement permits borrowings of up to $250 million as well as the possibility of a $50 million accordion
feature, if successfully subscribed. At December 31, 2020, there were no outstanding borrowings on our Revolving Credit
Agreement; 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, 2020, the outstanding balance of the Mortgage Loans was approximately $36 million; 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 $35 million to manage our exposure to increases in
LIBOR on our Mortgage Loans. Per the interest rate cap agreement, we are entitled to receive cash payments if and when the
three-month LIBOR exceeds 2.35%. Additional information on our interest rate cap agreement is provided in Note 11 of the
Notes to Consolidated Financial Statements.
Two of our insurance subsidiaries are members of an FHLB. Through membership, those subsidiaries have access to
secured cash advances which can be used for liquidity purposes or other operational needs. In order for us to use FHLB
proceeds, regulatory approvals may be required depending on the nature of the transaction. To date, those subsidiaries have not
materially utilized their membership for borrowing purposes.
70
Results of Operations - Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Selected consolidated financial data for each period is summarized in the table below:
($ in thousands, except per share data)
2020
2019
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 (1)
SPC U.S. federal income tax expense (1)
SPC dividend expense (income)
Interest expense
Goodwill impairment
Total expenses
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Non-GAAP operating income (loss)
Earnings (loss) per share:
Basic
Diluted
Non-GAAP operating income (loss) per share:
Basic
Diluted
Net loss ratio
Underwriting expense ratio (1)
Combined ratio
Operating ratio
Effective tax rate
Return on equity
$ 747,701 $ 842,725 $
$ 792,715 $ 847,532 $
60,077
15,678
6,470
874,940
83,208
59,874
9,220
999,834
(95,024)
(54,817)
(23,131)
(44,196)
(2,750)
(124,894)
661,447
237,881
1,746
14,304
15,503
161,115
1,091,996
(217,056)
(41,329)
$ (175,727) $
(27,741) $
$
753,915
252,449
1,059
4,579
16,636
—
1,028,638
(28,804)
(29,808)
(92,468)
(14,568)
687
9,725
(1,133)
161,115
63,358
(188,252)
(11,521)
1,004 $ (176,731)
16,038
(43,779) $
$
$
$
$
(3.26) $
(3.26) $
0.02 $
0.02 $
(3.28)
(3.28)
(0.52) $
(0.52) $
(0.81) $
(0.81) $
0.29
0.29
83.4%
30.0%
113.4%
104.3%
19.0%
(12.3%)
89.0%
29.8%
118.8%
107.8%
103.5%
0.1%
(5.6 pts)
0.2 pts
(5.4 pts)
(3.5 pts)
(84.5 pts)
(12.4 pts)
(1) In our December 31, 2019 report on Form 10-K, underwriting, policy acquisition and operating expenses and the
underwriting expense ratio in 2019 included a provision for U.S. federal income taxes of $1.1 million for certain SPCs at
Inova Re. Beginning in 2020, this tax provision is now presented as a separate line on our Consolidated Statements of
Income and Comprehensive Income as SPC U.S. federal income tax expense. We have recast 2019 to conform to this new
presentation, including the calculation of the underwriting expense ratio. See further discussion in the Segment Results -
Segregated Portfolio Cell Reinsurance section that follows.
In all tables that follow, the abbreviation "nm" indicates that the information or the percentage change is not meaningful.
71
Executive Summary of Operations
The following sections provide an overview of our consolidated and segment results of operations for the year ended
December 31, 2020 as compared to the year ended December 31, 2019. See the Segment Results sections that follow for
additional information regarding each segment's results. For a full discussion of the changes in the financial condition, results of
operations and cash flows for the year ended December 31, 2019 as compared to the year ended December 31, 2018, please
refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of
ProAssurance's December 31, 2019 report on Form 10-K. Any significant retrospective revisions in the presentation of the
changes in the financial condition, results of operations and cash flows for the year ended December 31, 2019 as compared to
the year ended December 31, 2018 as reported in ProAssurance's December 31, 2019 report on Form 10-K are located in this
report under the section that follows titled "Results of Operations - Year Ended December 31, 2019 Compared to Year Ended
December 31, 2018."
Revenues
The following table shows our consolidated and segment net premiums earned:
($ in thousands)
2020
2019
Change
Year Ended December 31
Net Premiums Earned
Specialty P&C
$ 477,365 $ 499,058 $ (21,693)
Workers' Compensation Insurance
171,772
189,240
(17,468)
(4.3%)
(9.2%)
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Consolidated total
66,352
77,226
78,563
80,671
(12,211)
(15.5%)
(3,445)
(4.3%)
(6.5%)
$ 792,715 $ 847,532 $ (54,817)
For the year ended December 31, 2020, consolidated net premiums earned included $14.3 million of tail premium written
and fully earned during the second quarter of 2020 in connection with a large national healthcare account in our Specialty P&C
segment (see further discussion under the heading "Expenses" in this section and in our Segment Results - Specialty Property &
Casualty section that follows). Consolidated net premiums earned for the year ended December 31, 2019 included $2.7 million
of premium written and fully earned from a loss portfolio transfer entered into during the third quarter of 2019 in our Specialty
P&C segment (see further discussion in our Segment Results - Specialty Property & Casualty section that follows). Excluding
the impact of the large national healthcare account's tail policy premium and the 2019 loss portfolio transfer, consolidated net
premiums earned decreased $66.4 million during 2020 as compared to 2019. All of our operating segments contributed to the
remaining decrease in consolidated net premiums earned, particularly our Specialty P&C segment due to our re-underwriting
efforts as we continue to emphasize careful risk selection, rate adequacy and a willingness to walk away from business that does
not fit our goal of achieving a long-term underwriting profit. For our Workers' Compensation Insurance and Segregated
Portfolio Cell Reinsurance segments, the decrease in net premiums earned primarily reflected the competitive workers'
compensation market conditions and, for the Segregated Portfolio Cell Reinsurance segment, the reduction in premium funding
for a large workers' compensation alternative market program. The decrease in net premiums earned in our Lloyd's Syndicates
segment was driven by our decreased participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from
61%.
The following table shows our consolidated net investment result:
($ in thousands)
2020
2019
Change
Net investment income
$ 71,998 $ 93,269 $ (21,271)
(22.8%)
Equity in earnings (loss) of unconsolidated subsidiaries
(11,921)
(10,061)
(1,860)
(18.5%)
Net investment result
$ 60,077 $ 83,208 $ (23,131)
(27.8%)
Year Ended December 31
The decrease in our consolidated net investment result for the year ended December 31, 2020 as compared to 2019 was
driven by a decrease in our allocation to equities and lower yields on our short-term investments and corporate debt securities
given the actions taken by the Federal Reserve to aggressively reduce interest rates in response to COVID-19. 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. The decrease in our equity in earnings (loss) of
unconsolidated subsidiaries in 2020 as compared to 2019 was due to lower reported earnings from several LPs/LLCs driven by
72
the volatility in the global financial markets related to COVID-19, partially offset by lower tax credit partnership operating
losses.
The following table shows our total consolidated net realized investment gains (losses):
($ in thousands)
2020
2019
Change
Net impairment losses recognized in earnings
$
(1,508) $
(751) $
(757)
(100.8%)
Other net realized investment gains (losses)
17,186
60,625
(43,439)
(71.7%)
Net realized investment gains (losses)
$ 15,678 $ 59,874 $ (44,196)
(73.8%)
Year Ended December 31
For the year ended December 31, 2020, we recognized $1.5 million of credit-related impairment losses in earnings and a
nominal amount of non-credit impairment losses in OCI. The credit-related impairment losses recognized in 2020 primarily
related to corporate bonds in the energy and consumer sectors. Additionally, 2020 included credit-related impairment losses
related to four corporate bonds in various sectors, which were sold in 2020. The non-credit impairment losses recognized during
2020 related to three corporate bonds in the energy and consumer sectors. We recognized credit-related impairment losses in
earnings of $0.8 million and nominal amount of non-credit impairment losses in OCI during 2019, both of which related to
three corporate bonds in the energy and consumer sectors.
We recognized $17.2 million of consolidated other net realized investment gains in 2020, driven by realized gains on the
sale of our available-for-sale fixed maturities and equity investments which were partially offset by unrealized holding losses
resulting from decreases in the fair value on our equity portfolio due to the volatility in the global financial markets related to
COVID-19. Consolidated other net realized investment gains recognized in 2019 reflected both realized gains from the sale of
equity investments and unrealized holdings gains on our equity portfolio due to the improvement in the market since
December 31, 2018, which caused our equity securities to increase in value. See further discussion in our Segment Results -
Corporate section that follows.
Expenses
The following table shows our consolidated and segment net loss ratios and net loss development:
Current accident year net loss ratio
($ in millions)
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
Favorable (unfavorable) net loss development, prior
accident years
Consolidated
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance
Lloyd's Syndicates
Year Ended December 31
2020
2019
Change
89.8%
90.3%
104.2%
105.5%
(0.5 pts)
(1.3 pts)
69.0%
69.6%
64.2%
83.4%
98.5%
64.9%
44.6%
65.0%
68.4%
0.6 pts
79.6%
(10.0 pts)
58.2%
6.0 pts
89.0%
106.7%
64.3%
(5.6 pts)
(8.2 pts)
0.6 pts
66.7%
(22.1 pts)
58.7%
6.3 pts
$ 50.4
$ 27.5
$
7.0
$ 16.5
(0.6)
$
$ 11.8
(5.7)
$
$
7.8
$ 10.1
(0.4)
$
$ 38.6
$ 33.2
$ (0.8)
$ 6.4
$ (0.2)
73
The primary drivers of the change in our consolidated current accident year net loss ratio for the year ended December 31,
2020 as compared to 2019 were as follows:
Estimated ratio increase (decrease) attributable to:
(In percentage points)
Large national healthcare account
COVID-19 reserve
Change in DDR reserve adjustment
E&O liability policy reserve
All other, net
Decrease in the consolidated current accident year net loss ratio
Increase (Decrease),
2020 versus 2019
2.0 pts
1.3 pts
(0.8 pts)
(1.2 pts)
(1.8 pts)
(0.5 pts)
Our consolidated current accident year net loss ratio in 2020 and 2019 was impacted by a large national healthcare
account. In 2019, we increased our reserve estimates in our Specialty P&C segment for this account's claims-made policy based
on our in-depth review of our current accident year reserve which we believed best reflected emerging data at that time. In
addition, we recognized a PDR of $9.2 million during the fourth quarter of 2019 related to this account which increased current
accident year net losses. The PDR represented an estimated premium deficiency associated with the unearned premium of this
account's claims-made policy as of the end of 2019. During 2020, this PDR was amortized back into current accident year net
losses which offset the impact of the losses incurred in 2020 associated with the earned premium related to this account's
claims-made policy. During the second quarter of 2020, the policy term associated with this account's claims-made policy
expired. This account did not renew on terms offered by us and the insured exercised its contractual option to purchase the
extended reporting endorsement or "tail" coverage resulting in a net underwriting loss of $45.7 million in our Specialty P&C
segment during the second quarter of 2020. The net impact of this large national healthcare account resulted in a 2.0 percentage
point increase in our consolidated current accident year net loss ratio in 2020 as compared to 2019. See further discussion on
the large national healthcare account in our Segment Results - Specialty Property & Casualty section that follows. Also during
the second quarter of 2020, we established a $10 million reserve in our Specialty P&C segment for COVID-19 which increased
our current accident year net loss ratio by 1.3 percentage points in 2020 (see further discussion in our Segment Results -
Specialty Property & Casualty section that follows). In addition, our consolidated current accident year net loss ratio in 2019
included the impact of an increase to our reserve in our Specialty P&C segment related to DDR coverage endorsements which
accounted for 0.8 percentage points of the decrease in the 2020 ratio as compared to 2019. Furthermore, our consolidated
current accident year net loss ratio in 2019 was affected by a $10 million reserve established by an SPC at Eastern Re
associated with an assumed E&O liability policy which accounted for 1.2 percentage points of the decrease in our consolidated
current accident year net loss ratio in 2020 as compared to 2019 (see further discussion in our Segment Results - Segregated
Portfolio Cell Reinsurance section that follows). Excluding the impacts of the previously discussed items, our consolidated
current accident year net loss ratio decreased 1.8 percentage points in 2020 as compared to 2019. This remaining decrease was
driven by a lower current accident year net loss ratio in our Specialty P&C segment primarily due to decreases in certain loss
ratios in 2020 in our Standard Physician, Specialty and Small Business Unit lines as a result of our re-underwriting efforts and
focus on rate adequacy (see further discussion in our Segment Results - Specialty P&C section that follows).
In both 2020 and 2019, 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 recognized in 2019 included $51.5 million of unfavorable
prior year reserve development in our Specialty P&C segment 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 the large national healthcare account in 2019, our consolidated net favorable
prior year reserve development was $12.9 million lower as compared to 2019 driven by our Specialty P&C segment given our
concerns around elevated loss severity in the broader medical professional liability industry, including our Specialty line of
business, and the possibility of delays in reporting and uncertainty surrounding the length and severity of the COVID-19
pandemic. In both our Specialty P&C and Workers' Compensation Insurance segments, we have observed a reduction in claims
frequency as compared to 2019, some of which is likely associated with the COVID-19 pandemic. As it relates to our Workers'
Compensation Insurance segment, legislative and regulatory bodies in certain states have changed or are attempting to change
compensability requirements and presumptions for certain types of workers related to COVID-19 claims. These endeavors
could have an adverse impact on the frequency and severity related to COVID-19 claims. Furthermore, as it relates to both our
Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the current economic conditions
resulting from the COVID-19 pandemic have introduced significant risk of a prolonged recession, which could have an adverse
impact on our return to wellness efforts and the ability of injured workers to return to work, resulting in a potential reduction in
favorable claim trends in future periods.
74
Our consolidated and segment underwriting expense ratios were as follows:
Underwriting Expense Ratio
Consolidated (1)
Specialty P&C
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance (1)
Lloyd's Syndicates
Corporate (2)
Year Ended December 31
2020
2019
Change
30.0%
23.0%
32.9%
31.2%
39.0%
3.0%
29.8%
24.1%
30.4%
29.5%
43.0%
2.3%
0.2 pts
(1.1 pts)
2.5 pts
1.7 pts
(4.0 pts)
0.7 pts
(1) In our December 31, 2019 report on Form 10-K, underwriting, policy acquisition and operating expenses and
underwriting expense ratio in 2019 included a provision for U.S. federal income taxes of $1.1 million for certain
SPCs at Inova Re. Beginning in 2020, this tax provision is now presented as a separate line on our Consolidated
Statements of Income and Comprehensive Income as SPC U.S. federal income tax expense. We have recast 2019 to
conform to this new presentation, including the calculation of the underwriting expense ratio. See further discussion
in the Segment Results - Segregated Portfolio Cell Reinsurance section that follows.
(2) 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).
The change in our consolidated underwriting expense ratio for the year ended December 31, 2020 as compared to 2019
was primarily attributable to the following:
(In percentage points)
Increase (Decrease),
2020 versus 2019
Estimated ratio increase (decrease) attributable to:
Decrease in consolidated net premiums earned and DPAC amortization(1)
One-time expenses
Professional fees
Large national healthcare account tail policy premium(2)
All other, net
Increase in the consolidated underwriting expense ratio
2.0 pts
0.7 pts
0.3 pts
(0.6 pts)
(2.2 pts)
0.2 pts
(1) Excludes the large national healthcare account tail policy premium in 2020 and certain one-time expenses included in DPAC
amortization of $0.6 million in 2020. See further discussion in Segment Results - Specialty Property & Casualty section that
follows.
(2) See previous discussion under the heading "Revenues"
Our consolidated underwriting expense ratio in 2020 was impacted by a decline in consolidated net premiums earned
which outpaced the decline in consolidated DPAC amortization, accounting for 2.0 percentage points of the increase in the
ratio, driven by lower earned premium in our Specialty P&C and Workers' Compensation Insurance segments. Our consolidated
underwriting expense ratio also reflected one-time expenses of $5.4 million in 2020 mainly comprised of early retirement
benefits granted to certain employees and expenses associated with the restructuring of our HCPL field office organization. In
addition, our consolidated underwriting expense ratio was impacted by an increase in professional fees in our Corporate
segment associated with our planned acquisition of NORCAL as well as corporate legal expenses. The remaining decrease in
our consolidated underwriting expense ratio in 2020 of 2.2 percentage points primarily reflected the impact of a decrease in
various operational expenses resulting from incremental improvements over the past year in our Specialty P&C segment
including organizational structure enhancements and improved operating efficiencies. In addition, the remaining decrease in our
consolidated underwriting expense ratio reflected lower operating expenses in our Lloyd's Syndicates segment due to our
reduced participation in Syndicate 1729, lower consolidated travel-related costs due to COVID-19 and, to a lesser extent, a
reduction of $1.7 million in employer contributions to the ProAssurance Savings Plan (see further discussion in Note 17 of the
Notes to Consolidated Financial Statements).
75
Taxes
Our effective tax rates for the years ended December 31, 2020 and 2019 were as follows:
Year Ended December 31
($ in thousands)
2020
2019
Change
Income (loss) before income taxes
$
(217,056) $
(28,804) $ (188,252)
653.6 %
Income tax expense (benefit)
(41,329)
(29,808)
(11,521)
38.7 %
Net income (loss)
Effective tax rate
$
(175,727) $
1,004 $ (176,731)
nm
19.0%
103.5%
(84.5 pts)
We recognized an income tax benefit in both 2020 and 2019. Our effective tax rates for the years ended December 31,
2020 and 2019 were different from the statutory federal income tax rate of 21% primarily due to the benefit recognized from
the tax credits transferred to us from our tax credit partnership investments. In addition, our effective tax rate in 2020 was also
impacted by the non-deductible portion of the goodwill impairment related to the Specialty P&C reporting unit recognized
during the third quarter of 2020. See further discussion of the goodwill impairment under the heading "Goodwill / Intangibles"
in the Critical Accounting Estimates section and Notes 1 and 6 of the Notes to Consolidated Financial Statements and further
information on other notable items impacting our effective tax rate in the Segment 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, 2020 and 2019 was as
follows:
Year Ended December 31
2020
2019
Change
Combined ratio
113.4%
118.8%
Less: investment income ratio
9.1%
11.0%
Operating ratio
104.3%
107.8%
(5.4 pts)
(1.9 pts)
(3.5 pts)
Our operating ratio for the year ended December 31, 2020 as compared to 2019 decreased approximately 3.5 percentage
points driven by a lower net loss ratio in our Specialty P&C segment. The decrease in our net loss ratio in our Specialty P&C
segment was driven by the change in prior year reserve development and, to a lesser extent, an improvement in our current
accident year net loss ratio primarily the result of our re-underwriting efforts and focus on rate adequacy. 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 and Loss Adjustment Expenses." The decrease in our
operating ratio in 2020 as compared to 2019 was partially offset by a lower investment income ratio primarily due to a decrease
in our allocation to equities and lower yields on our short-term investments and corporate debt securities given the recent
actions taken by the Federal Reserve in response to COVID-19.
ROE
ROE is calculated as net income (loss) 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, 2020 and 2019 was as follows:
ROE
Year Ended December 31
2020
2019
Change
(12.3%)
0.1%
(12.4 pts)
Our ROE for the year ended December 31, 2020 primarily reflected a $161.1 million pre-tax goodwill impairment
recognized related to the Specialty P&C reporting unit during the third quarter of 2020, which decreased our ROE by
approximately 11.2 percentage points. See further discussion of the goodwill impairment under the heading "Goodwill /
Intangibles" in the Critical Accounting Estimates section and Notes 1 and 6 of the Notes to Consolidated Financial Statements.
Additionally, the decrease in our ROE in 2020 as compared to 2019 reflected lower consolidated net realized investment gains
76
and, to a lesser extent, a decrease in our consolidated net investment income (see previous discussion in this section under the
heading "Revenues").
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, 2020 as compared to December 31, 2019 is shown in the following table.
Book Value Per Share at December 31, 2019
Increase (decrease) to book value per share during the year ended
December 31, 2020 attributable to:
Book Value Per
Share
$
28.11
Dividends declared
Net income (loss)
OCI
Other *
Book Value Per Share at December 31, 2020
$
(0.46)
(3.26)
0.71
(0.06)
25.04
* Includes the impact of cumulative effect adjustments related to ASUs adopted during 2020
and the impact of share-based compensation.
77
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 effects of the items listed in the
following table that do not reflect normal 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 (loss) computed in
accordance with GAAP.
The following table is a reconciliation of net income (loss) to Non-GAAP operating income (loss):
Net income (loss)
(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)
Goodwill impairment
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 (loss)
Effect of exclusions
Non-GAAP operating income (loss) per diluted common share
Year Ended December 31
2020
2019
$
(175,727) $
1,004
(15,678)
(59,874)
2,436
161,115
97
147,970
16
147,986
(27,741) $
(3.26) $
2.74
(0.52) $
3,144
—
43
(56,687)
11,904
(44,783)
(43,779)
0.02
(0.83)
(0.81)
$
$
$
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell
Reinsurance segment. SPC 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 tax rate associated with the taxable or tax deductible items listed above. The taxes associated
with the net realized investment gains (losses) related to SPCs in our Segregated Portfolio Cell Reinsurance segment are paid
by the individual SPCs and are not included in our consolidated tax provision or net income (loss); therefore, both the net
realized investment gains (losses) from our Segregated Portfolio Cell Reinsurance segment and the adjustment to exclude the
portion of net realized investment gains (losses) included in the SPC dividend expense (income) in the table above are not tax
effected. The portion of the 2020 goodwill impairment loss that is tax deductible was tax affected at the statutory tax rate
(21%). The remaining portion of the 2020 goodwill impairment loss is not tax deductible and therefore had no associated
income tax benefit.
78
Segment Results - Specialty Property & Casualty
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance as
discussed in Note 16 of the Notes to Consolidated Financial Statements. Segment results reflected pre-tax underwriting profit or
loss from these insurance lines. Segment results included the following:
($ in thousands)
2020
2019
Change
Year Ended December 31
Net premiums written
Net premiums earned
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
Segment results
Net loss ratio
Underwriting expense ratio
Premiums Written
$ 451,019
$ 495,750
$ (44,731)
(9.0%)
$ 477,365
$ 499,058
$ (21,693)
3,908
(470,074)
(109,599)
5,796
(532,485)
(120,310)
(1,888)
62,411
10,711
$
(98,400)
$ (147,941)
$ 49,541
(4.3%)
(32.6%)
(11.7%)
(8.9%)
(33.5%)
98.5 %
23.0 %
106.7 %
24.1 %
(8.2 pts)
(1.1 pts)
Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of
new business 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. In addition, premium volume may periodically be affected by shifts in the timing of
renewals between periods. The 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 and other
periods of reduced competition. The professional liability area has been particularly affected by these cycles. Underwriting
cycles are generally driven by an excess of capacity available and actively pursuing business that is deemed profitable. Changes
in the frequency and severity of losses may affect the cycles of the insurance and reinsurance markets significantly. During
“soft markets” where price competition is high and underwriting profits are poor, growth and retention of business become
challenging which may result in reduced premium volumes.
As a result of COVID-19, we continue to experience downward pressure on our premium volume resulting from new
business disruptions. We have also experienced reductions in exposure due to insureds moving to part-time as a result of a
general reduction in non-COVID-19 healthcare consumption and suspension of elective medical procedures. However, the
length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted. In
an effort to provide premium relief for insureds adversely impacted by the COVID-19 pandemic and to adjust for changes in
exposures we granted premium credits totaling $4.1 million during the year ended December 31, 2020.
Gross, ceded and net premiums written were as follows:
($ in thousands)
2020
2019
Change
Gross premiums written
$ 522,911 $ 577,700 $ (54,789)
(9.5%)
Less: Ceded premiums written
71,892
81,950
(10,058)
(12.3%)
Net premiums written
$ 451,019 $ 495,750 $ (44,731)
(9.0%)
Year Ended December 31
79
Gross Premiums Written
During the second quarter of 2020, we reorganized our presentation of gross premiums written by component and related
metrics below to better align with the current internal management reporting structure within the segment. All prior period
information has been recast to conform to the current period presentation.
Gross premiums written by component were as follows:
($ in thousands)
2020
2019
Change
Year Ended December 31
Professional Liability
HCPL
Standard Physician(1)(10)
Twelve month term
Twenty-four month term
Total Standard physician
Specialty
Custom Physician(2)(10)
Hospitals and Facilities(3)(10)
Senior Care(4)(10)
Reinsurance (assumed)
Loss portfolio transfers (retroactive)(5)
Total Specialty
Total HCPL
Small Business Unit(6)
Tail Coverages(5)(7)
Total Professional Liability
Medical Technology Liability(8)
Other(9)
Total
$ 208,993 $ 217,110 $
(8,117)
(3.7%)
8,314
26,863
(18,549)
(69.1%)
217,307
243,973
(26,666)
(10.9%)
64,367
49,244
6,300
14,467
—
134,378
351,685
100,061
34,767
86,743
47,454
21,484
11,805
900
168,386
412,359
106,355
21,724
(22,376)
(25.8%)
1,790
3.8%
(15,184)
(70.7%)
2,662
(900)
22.5%
nm
(34,008)
(20.2%)
(60,674)
(14.7%)
(6,294)
(5.9%)
13,043
60.0%
486,513
540,438
(53,925)
(10.0%)
35,563
835
35,128
2,134
435
1.2%
(1,299)
(60.9%)
$ 522,911 $ 577,700 $ (54,789)
(9.5%)
(1) Standard Physician premium was our greatest source of premium revenues in both 2020 and 2019 and is predominately
comprised of twelve month term policies. The decrease in twelve month term policies in 2020 was driven by retention
losses and, to a lesser extent, premium credits granted as a result of the COVID-19 pandemic, partially offset by an
increase in renewal pricing, conversion of twenty-four month term policies and, to a lesser extent, new business written.
In addition, twelve month term policies in 2020 included adjustments related to loss sensitive policies which increased
written and earned premium. Renewal pricing increases in 2020 reflect the rising loss cost environment and new business
written reflects the impact of lower submissions as a result of the COVID-19 pandemic as well as general market
conditions. The lower retention for 2020 is largely attributable to our focus on underwriting discipline as we continue to
emphasize careful risk selection, rate adequacy, improved contract terms and a willingness to walk away from business
that does not fit our goal of achieving a long-term underwriting profit. In addition, we have implemented a targeted state
strategy to reassess our underwriting appetite in certain unprofitable states which impacted our retention rate in the current
period. We will continue to perform a detailed evaluation of venues, specialties and other areas to improve our
underwriting results. These strategies resulted in our non-renewal of several large policies totaling $8.7 million in 2020.
We anticipate a lower than average level of retention to persist as we continue to reevaluate certain states and books of
business and set our rates to reflect our observations of higher severity trends. Standard Physician premium also includes
twenty-four month term premiums that were offered to physician insureds in one selected jurisdiction. The decrease in
twenty-four month term premiums in 2020 primarily reflected the normal cycle of renewals (policies subject to renewal in
2020 were previously written in 2018, rather than in 2019). In addition, the decrease in twenty-four month term premiums
also reflected our re-underwriting of the majority of renewed policies to twelve month term policies, as we ceased offering
twenty-four month term policies beginning in the second quarter of 2020.
(2) Custom Physician premium includes large complex physician groups, multi-state physician groups and non-standard
physicians and is written primarily on an excess and surplus lines basis. The decrease in premium in 2020 was driven by
retention losses due to our focus on underwriting discipline as we continue to emphasize careful risk selection, rate
adequacy, improved contract terms and a willingness to walk away from business that does not fit our goal of achieving a
80
long-term underwriting profit. Included in these retention losses is a large national healthcare account that did not renew
on terms offered by us during the second quarter of 2020 which resulted in a $9.0 million decrease in Custom Physician
premium and, as a result, a decrease to our Specialty retention rate of 4 percentage points; this account exercised its
contractual option to purchase extended reporting endorsement or "tail" coverage (see further discussion in footnote 7 that
follows). We anticipate retention rates to begin to normalize going forward as we substantially completed our re-
underwriting efforts as of the end of 2020, except for a few large accounts that were renewed on a two-year term in 2019
that will be carefully evaluated in 2021. The decrease in Custom Physician premium in 2020 as compared to 2019 also
reflects net timing differences of $1.9 million related to the prior year renewal of two policies, partially offset by an
increase in renewal pricing and, to a lesser extent, new business written. Renewal pricing increases in 2020 reflect the
rising loss cost environment and new business written reflects the impact of lower submissions as a result of the
COVID-19 pandemic as well as general market conditions.
(3) Hospitals and Facilities premium (which includes hospitals, surgery centers and miscellaneous medical facilities)
increased in 2020 as compared to 2019 primarily due to an increase in renewal pricing and, to a lesser extent, new
business written, including the addition of two policies totaling $3.2 million, partially offset by retention losses. Renewal
pricing increases in 2020 reflect rate increases and contract modifications that we believe are appropriate given the current
loss environment and new business written reflects lower submissions as a result of COVID-19 as well as general market
conditions. Retention losses in 2020 were driven by our decision not to renew certain products and the loss of two large
policies totaling $4.3 million. As we have substantially completed our re-underwriting efforts on certain books of business
as of the end of the third quarter of 2020, we anticipate retention rates to begin to normalize going forward.
(4) Senior Care premium includes facilities specializing in long term residential care primarily for the elderly ranging from
independent living through skilled nursing. Our Senior Care premium decreased in 2020 as compared to 2019 primarily
due to retention losses, partially offset by new business written. Retention losses in 2020 were driven by our decision not
to renew certain classes of Senior Care business based on our expectations of poor loss performance, including our non-
renewal of two large policies totaling $7.2 million. As of the end of the third quarter of 2020, we have completed our re-
underwriting efforts on certain books of business and anticipate retention rates to begin to normalize going forward.
(5) We offer custom alternative risk solutions including loss portfolio transfers for healthcare entities who, 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 (see further discussion in footnote 7 that follows).
(6) Our Small Business Unit is primarily comprised of premium associated with podiatrists, legal professionals, dentists and
chiropractors. Our Small Business Unit premium decreased in 2020 as compared to 2019 driven by retention losses and,
to a lesser extent, reductions in exposure of $2.0 million primarily due to our insureds moving to part-time as a result of a
general reduction in non-COVID-19 healthcare consumption, partially offset by new business written and, to a lesser
extent, an increase in renewal pricing. The increase in renewal pricing in 2020 was primarily the result of an increase in
the rate charged for certain renewed policies in select states.
(7) 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 stand-alone 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 increase in
2020 as compared to 2019 was due to a large national healthcare account that exercised its contractual option to purchase
tail coverage which resulted in $14.3 million of one-time premium written and fully earned in the second quarter of 2020,
somewhat offset by the tail coverage provided in connection with the aforementioned third quarter 2019 loss portfolio
transfer.
(8) 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. Our Medical Technology Liability
premium remained relatively unchanged in 2020 as compared to 2019 as retention losses and renewal pricing decreases
were offset by new business written. New business written in 2020 reflects the addition of a few COVID-19 related
policies. Retention losses in 2020 are primarily attributable to an increase in competition on terms and pricing. Renewal
pricing decreases in 2020 are primarily due to changes in the sales volume of certain insureds, including changes in
COVID-19 related exposure on several renewing policies.
(9) This component of gross premiums written includes all other product lines within our Specialty P&C segment. The
decrease in 2020 was due to the effect of our non-renewal of a $1.5 million specialty contractual liability policy.
81
(10) Certain components of our gross premiums written include alternative market premiums. We currently cede either all or a
portion of the alternative market premium, net of reinsurance, to three SPCs of our wholly owned Cayman Islands
reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance
segment (see further discussion in the Ceded Premiums Written section that follows). The portion not ceded to the SPCs is
retained within our Specialty P&C segment.
($ in millions)
2020
2019
Change
Year Ended December 31
Standard Physician
Custom Physician
Hospitals and Facilities
Senior Care
Total
$
1.6 $
1.4 $
0.2
14.3%
0.1
0.2
5.2
0.2
—
6.2
$
7.1 $
7.8 $
(0.1)
(50.0%)
0.2
(1.0)
(0.7)
nm
(16.1%)
(9.0%)
The decrease in alternative market gross premiums written in 2020 as compared to 2019 was due to retention losses driven
by the loss of a $1.4 million Senior Care policy that chose to utilize self-insurance, slightly offset by policy endorsements.
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 terms and conditions.
The change in renewal pricing for our Specialty P&C segment, including by major component, was as follows:
Specialty P&C segment
HCPL
Standard Physician(1)
Specialty(1)
Total HCPL
Small Business Unit(1)
Medical Technology Liability(1)
Year Ended
December 31
2020
9 %
11 %
15 %
12 %
4 %
(1%)
(1) See Gross Premiums Written section for further explanation of changes in
renewal pricing.
New business written by major component on a direct basis was as follows:
(In millions)
Year Ended December 31
2020
2019
HCPL
Standard Physician
Specialty
Total HCPL
Small Business Unit
Medical Technology Liability
Total
$
2.9 $
9.0
11.9
4.6
6.5
9.2
25.0
34.2
4.2
4.2
$
23.0 $
42.6
82
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
HCPL
Standard Physician(1)
Specialty(1)
Total HCPL
Year Ended December 31
2020
2019
79 %
86 %
82 %
65 %
76 %
87 %
70 %
81 %
Small Business Unit(1)
Medical Technology Liability(1)
92 %
88 %
(1) See Gross Premiums Written section for further explanation of retention decline in 2020.
90 %
85 %
83
Ceded Premiums Written
Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. For our
HCPL and Medical Technology Liability excess of loss reinsurance arrangements in effect prior to October 1, 2020, we
generally retained the first $1 million in risk insured by us and ceded coverages in excess of this amount. Effective October 1,
2020, we generally retain the first $2 million in risk insured by us and cede coverages in excess of this amount. For our HCPL
coverages, we will also retain from 0% to 14.5% of the next $24 million of risk for coverages in excess of $2 million. For our
Medical Technology Liability treaty which also renewed effective October 1, 2020, we also retain 2.5% of the next $8 million
of risk for coverages in excess of $2 million. These changes in terms for both our HCPL and Medical Technology Liability
treaties resulted in a reduction to the gross rate paid for the treaty year effective October 1, 2020. We pay our reinsurers a
ceding premium in exchange for their accepting the risk, and in certain of our excess of loss arrangements, the ultimate amount
of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.
Ceded premiums written were as follows:
($ in thousands)
Excess of loss reinsurance arrangements (1)
Other shared risk arrangements (2)
Premium ceded to SPCs (3)
Other ceded premiums written
Adjustment to premiums owed under reinsurance agreements, prior
accident years, net (4)
Total ceded premiums written
Year Ended December 31
2020
2019
Change
$ 33,070 $ 35,014 $
(1,944)
(5.6%)
28,765
33,976
(5,211)
(15.3%)
6,118
3,227
6,860
3,266
(742)
(39)
(10.8%)
(1.2%)
712
2,834
(2,122)
(74.9%)
$ 71,892 $ 81,950 $ (10,058)
(12.3%)
(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. The decrease in ceded premiums written under our excess of loss reinsurance arrangements in 2020 as
compared to 2019 primarily reflected a decrease in the overall volume of gross premiums written subject to cession
and, to a lesser extent, certain of our reinsurance arrangements reaching maximum limits eligible for cession on treaty
years effective October 1, 2017 and 2018. The decrease in ceded premiums written in 2020 also reflected the reduced
rate on the treaty year effective October 1, 2020, partially offset by the effect of changes to both minimum and
maximum limits for the treaty year effective October 1, 2019.
(2) 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. Effective October 1, 2020, our
arrangement with CAPAssurance was mutually dissolved as a result of our pending acquisition with NORCAL and
their concentration in the state of California. The decrease in ceded premiums written under our shared risk
arrangements in 2020 as compared to 2019 was primarily due to a decrease in premium ceded to our Ascension
Health program, our non-renewal of two large policies in certain of our other shared risk arrangements and, to a lesser
extent, the aforementioned dissolution of our arrangement with CAPAssurance.
(3) 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 Results -
Segregated Portfolio Cell Reinsurance section for further discussion on the cession to the SPCs from our Specialty
P&C segment. The decrease in premiums ceded to SPCs during 2020 as compared to 2019 was primarily due to the
loss of one large Senior Care policy (see discussion in footnote 10 under the heading "Gross Premiums Written").
84
(4) Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable under
a reinsurance arrangement are known. As a part of the process of estimating our loss reserve we also make estimates
regarding the amounts recoverable under our reinsurance arrangements. As previously discussed, the premiums
ultimately ceded under certain of our excess of loss reinsurance arrangements are subject to the losses ceded under
the arrangements. As part of the review of our reserves during 2020 and 2019, 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 2020 as compared to 2019 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.
Ceded Premiums Ratio
As shown in the table below, our ceded premiums ratio was affected in both 2020 and 2019 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
2020
2019
Change
13.7%
14.2%
(0.5 pts)
0.1%
13.6%
0.5%
(0.4 pts)
13.7%
(0.1 pts)
For the year ended December 31, 2020 the ceded premiums ratio was relatively unchanged as compared to 2019.
85
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, prior to the third quarter of 2020, we wrote certain Standard Physician 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 associated underlying loss events occurred in
the past. Additionally, any 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)
2020
2019
Change
Gross premiums earned
$ 551,822 $ 580,796 $ (28,974)
Less: Ceded premiums earned
74,457
81,738
(7,281)
Net premiums earned
$ 477,365 $ 499,058 $ (21,693)
(5.0%)
(8.9%)
(4.3%)
The decrease in gross premiums earned in 2020 as compared to 2019 was driven by the pro rata effect of a decrease in the
volume of written premium during the preceding twelve months, predominantly in our Specialty line of business, due to our re-
underwriting efforts. The decrease in gross premiums earned also reflects the effect of a prior year loss portfolio transfer which
resulted in $2.7 million of one-time premium written and fully earned in 2019 (see previous discussion in footnotes 5 and 7
under the heading "Gross Premiums Written"). The decrease in gross premiums earned in 2020 was somewhat offset by
premium adjustments related to loss sensitive policies which increased earned premium by $2.9 million and decreased earned
premium by $1.6 million in 2019. In addition, the decrease in gross premiums earned was largely offset by $14.3 million of
one-time premium written and fully earned in the second quarter of 2020 associated with the tail coverage purchased by a large
national healthcare account (see previous discussion in footnote 7 under the heading "Gross Premiums Written").
The decrease in ceded premiums earned during 2020 as compared to 2019 reflected the effect of adjustments made during
2020 and 2019 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 $5.2 million in
2020 as compared to 2019. The remaining decrease was driven by the pro rata effect of a decrease in premium ceded under our
shared risk and excess of loss arrangements during the preceding twelve months.
86
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 ECO/XPL losses.
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)
Current accident year net loss ratio, excluding the effect of prior year ceded
premium (3)
Net Loss Ratios (1)
Year Ended December 31
2020
2019
Change
98.5%
106.7%
(8.2 pts)
(5.7%)
1.2%
(6.9 pts)
104.2 % 105.5 % (1.3 pts)
0.2%
0.6%
(0.4 pts)
104.0 % 104.9 % (0.9 pts)
(1) Net losses, as specified, divided by net premiums earned.
(2) During 2020 and 2019, 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), decreased 0.9 percentage points as compared to 2019. The change in the current accident year net
loss ratio was primarily attributable to the following:
Estimated ratio increase (decrease) attributable to:
(In percentage points)
Large national healthcare account
COVID-19 reserve
Change in DDR reserve adjustment
All other, net
Decrease in the current accident year net loss ratio, excluding the effect of prior year
ceded premium
Increase (Decrease),
2020 versus 2019
2.9 pts
2.2 pts
(1.5 pts)
(4.5 pts)
(0.9 pts)
Our current accident year net loss ratio in 2020 and 2019 was impacted by a large national healthcare account. In
2019, we increased our reserve estimates for this account's claims-made policy during the fourth quarter of 2019
based on our in-depth review of our current accident year reserve which we believed best reflected emerging data at
that time. In addition, we recognized a PDR of $9.2 million during the fourth quarter of 2019 related to this account
which increased current accident year net losses. The PDR represented an estimated premium deficiency associated
with the unearned premium of this account's claims-made policy as of the end of 2019. During 2020, this PDR was
amortized back into current accident year net losses which offset the impact of the losses incurred in 2020 associated
with the earned premium related to this account's claims-made policy. During the second quarter of 2020, the policy
87
term associated with this account's claims-made policy expired. This account did not renew on terms offered by us
and the insured exercised its contractual option to purchase the extended reporting endorsement or "tail" coverage
resulting in a net underwriting loss of $45.7 million in 2020. The net impact of this large national healthcare account
resulted in a 2.9 percentage point increase in our current accident year net loss ratio in 2020 as compared to 2019.
Also during the second quarter of 2020, we established a $10 million reserve for COVID-19; no adjustment has been
made to this reserve since the second quarter of 2020. This reserve represents our best estimate of ultimate
COVID-19 related losses based on currently available information and reported incidents, and accounted for a 2.2
percentage point increase in our current accident year net loss ratio in 2020. As a result of our actuarial analysis
performed at the end of 2019, we increased our reserves related to DDR coverage endorsements which accounted for
approximately 1.5 percentage points of the decrease in the current accident year net loss ratio in 2020 as compared
to 2019; no adjustment was made to these reserves in 2020. After removing the impact of the large national
healthcare account in both 2020 and 2019, the 2020 COVID-19 reserve and actuarial adjustment to our DDR
reserves in 2019, our current accident year net loss ratio in 2020 improved 4.5 percentage points primarily reflecting
the impact of decreases in certain loss ratios during 2020 and, to a lesser extent, the effect of changes in premium
adjustments related to loss sensitive policies (see previous discussion under the heading "Net Premiums Earned").
The decreases in loss ratios during 2020 were primarily in our Standard Physician, Specialty and Small Business
Unit lines of business as a result of our re-underwriting efforts and focus on rate adequacy.
We re-evaluate our previously established reserve each quarter based upon the most recently completed actuarial analysis
supplemented by any new analysis, information or trends that have emerged since the date of that study. We also take into
account currently available industry trend information. We continue to see elevated loss severity in the broader medical
professional liability industry and are observing indications of these increased severity trends in our paid loss data. While we
have established a reserve for COVID-19 related losses, we have also observed a significant reduction in claims frequency as
compared to 2019, some of which is likely associated with the COVID-19 pandemic and the disruption of the court systems;
however, we have remained cautious in recognizing these favorable frequency trends in our current accident year reserve due to
the possibility of delays in reporting and uncertainty surrounding the length and severity of the pandemic.
We recognized net favorable prior year reserve development of $27.5 million for the year ended December 31, 2020 as
compared to net unfavorable prior year reserve development of $5.7 million for the year ended December 31, 2019. Favorable
development recognized during 2020 principally related to accident years 2014 through 2017. Net unfavorable prior year
reserve development in 2019 included $51.5 million of unfavorable 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; unfavorable development recognized during 2019 related to accident years
2016 through 2018. 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. Prior accident year development recognized for years
ended December 31, 2020 and 2019 included a reduction in our reserve for potential ECO/XPL claims of $4.0 million and $0.3
million, respectively. Development recognized in both 2020 and 2019 also included favorable prior year reserve development
attributable to our medical technology liability line of business of $8.6 million and $13.3 million, respectively.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting
Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our
reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are
reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions
can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2020
and 2019.
Underwriting, Policy Acquisition and Operating Expenses
Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31,
2020 and 2019 were comprised as follows:
($ in thousands)
2020
2019
Change
DPAC amortization
$ 53,562 $ 56,604 $ (3,042)
(5.4%)
Year Ended December 31
Management fees
Other underwriting and operating expenses
Total
88
6,136
49,901
(606)
(7,063)
$ 109,599 $ 120,310 $ (10,711)
6,742
56,964
(9.0%)
(12.4%)
(8.9%)
DPAC amortization decreased during the year ended December 31, 2020 as compared to 2019 driven by a decrease in
earned premium, excluding the effect of the premium earned from the tail coverage associated with a large national healthcare
account from the second quarter of 2020 as there were no deferred acquisition costs associated with the tail premium (see
discussion under the heading "Gross Premiums Written"). In addition, the decrease in DPAC amortization reflected a decrease
in brokerage expenses due to our non-renewal of certain products written on an excess and surplus lines basis in our Specialty
line of business (see discussion under the heading "Gross Premiums Written") as well as a decrease in agent commissions and
premium taxes due to a lower volume of premium written. Partially offsetting the decrease in DPAC amortization in 2020 was
an increase in medical costs associated with employee health plans, one-time employee severance charges of $0.6 million and,
to a lesser extent, a decrease in ceding commission income, which is an offset to expense, 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 2020 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.
Other underwriting and operating expenses decreased during the year ended December 31, 2020 as compared to 2019
primarily driven by a decrease in various operational expenses resulting from incremental improvements over the past year
including organizational structure enhancements and improved operating efficiencies. The decrease in operating expenses also
reflected a reduction in travel-related costs of $3.3 million in 2020 as a result of the COVID-19 pandemic and, to a lesser
extent, a reduction in employer contributions to the ProAssurance Savings Plan (see further discussion in Note 17 of the Notes
to Consolidated Financial Statements). Furthermore, the decrease in operating expenses in 2020 as compared to 2019 also
included a reduction in fees associated with a data analytics services agreement of $0.6 million driven by an amendment to the
agreement executed during the fourth quarter of 2020 (see further discussion in Note 9 of the Notes to Consolidated Financial
Statements). The decrease in 2020 was largely offset by one-time expenses of $3.4 million mainly comprised of early
retirement benefits granted to certain employees in 2020 as well as expenses associated with the restructuring of our HCPL field
office organization, consisting of employee severance charges and lease exit costs due to a reduction in physical office
locations. The decrease in operating expenses in 2020 was also somewhat offset by an increase of $0.4 million in accrued paid
time off due to lower employee utilization of vacation time likely associated with the COVID-19 pandemic.
Underwriting Expense Ratio (the Expense Ratio)
Our expense ratio for the Specialty P&C segment for the year ended December 31, 2020 as compared to 2019 was as
follows:
Underwriting expense ratio
Year Ended December 31
2020
2019
Change
23.0%
24.1%
(1.1 pts)
The change in our expense ratio in 2020 as compared to 2019 was primarily attributable to the following:
(In percentage points)
Estimated ratio increase (decrease) attributable to:
Decrease in net premiums earned and DPAC amortization(1)
One-time expenses
Travel-related cost savings due to COVID-19
Large national healthcare account tail policy premium(2)
All other, net
Decrease in the underwriting expense ratio
Increase (Decrease),
2020 versus 2019
1.2 pts
0.8 pts
(0.7 pts)
(0.7 pts)
(1.7 pts)
(1.1 pts)
(1) Excludes the large national healthcare account tail policy premium in 2020 and certain one-time expenses
included in DPAC amortization of $0.6 million during 2020.
(2) See previous discussion under the heading "Gross Premiums Written"
The remaining decrease in our expense ratio during 2020 as compared to 2019 of 1.7 percentage points primarily reflected
the impact of a decrease in various operational expenses resulting from incremental improvements over the past year including
organizational structure enhancements and improved operating efficiencies and, to a lesser extent, the reduction in employer
contributions to the ProAssurance Savings Plan.
89
Segment Results - Workers' Compensation Insurance
Our Workers' Compensation Insurance segment includes workers' compensation products provided to employers
generally with 1,000 or fewer employees, as discussed in Note 16 of the Notes to Consolidated Financial Statements. Workers'
compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies,
deductible policies and alternative market programs. Alternative market programs include program design, fronting, claims
administration, risk management, SPC rental, asset management and SPC management services. Alternative market program
premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent,
an unaffiliated captive insurer for one program. Our Workers' Compensation Insurance segment results reflected pre-tax
underwriting profit or loss from these workers' compensation products, exclusive of investment results, which are included in
our Corporate segment. Segment results included the following:
($ in thousands)
2020
2019
Change
Year Ended December 31
$ 164,871 $ 182,233 $
(17,362)
(9.5%)
Net premiums written
Net premiums earned
Other income
Net losses and loss adjustment expenses
Underwriting, policy acquisition and operating expenses
(56,449)
(57,520)
$ 171,772 $ 189,240 $
(17,468)
2,216
2,399
(111,552)
(121,649)
(183)
10,097
1,071
(9.2%)
(7.6%)
(8.3%)
(1.9%)
Segment results
Net loss ratio
Underwriting expense ratio
$
5,987 $
12,470 $
(6,483)
(52.0%)
64.9%
32.9%
64.3%
30.4%
0.6 pts
2.5 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)
2020
2019
Change
Gross premiums written
$ 246,791 $ 278,442 $
(31,651)
(11.4%)
Less: Ceded premiums written
81,920
96,209
(14,289)
(14.9%)
Net premiums written
$ 164,871 $ 182,233 $
(17,362)
(9.5%)
Year Ended December 31
90
Gross Premiums Written
Gross premiums written by product were as follows:
($ in thousands)
2020
2019
Change
Year Ended December 31
Traditional business:
Guaranteed cost
Policyholder dividend
Deductible
Retrospective*
Other
Alternative market business
Change in EBUB estimate
Total
$
145,546 $
158,246 $
(12,700)
20,464
4,581
909
7,094
69,487
(1,290)
20,446
5,857
2,985
8,660
82,248
—
18
(1,276)
(2,076)
(1,566)
(12,761)
(1,290)
(8.0%)
0.1%
(21.8%)
(69.5%)
(18.1%)
(15.5%)
nm
$
246,791 $
278,442 $
(31,651)
(11.4%)
*The change in retrospectively-related policies included adjustments that decreased premium by $2.5 million and $2.1 million during
the years ended December 31, 2020 and 2019, respectively.
Gross premiums written in our traditional business decreased during the year ended December 31, 2020 as compared to
2019, which primarily reflected renewal rate decreases, retention losses and a reduction in audit premium and new business
written. The reduction in audit premium included a reduction in our EBUB estimate of $1.3 million in 2020. Renewal rate
decreases were 4% in 2020, which were unchanged as compared to 2019. Renewal retention for our traditional business was
84% during 2020 as compared to 79% during 2019. New business written totaled $23.7 million in 2020 as compared to
$27.0 million in 2019.
Gross premiums written in our alternative market business decreased during the year ended December 31, 2020 as
compared to 2019, which primarily reflected renewal rate decreases, retention losses and a decrease in audit premium. In
addition, the decline in alternative market business in 2020 also reflected the reduction in premium funding for one of our large
alternative market programs (see further discussion in our Segment Results - Segregated Portfolio Cell Reinsurance section that
follows). Renewal rate decreases were 4% in 2020 as compared to 5% in 2019. Retention in our alternative market business was
84% in 2020 which reflected the impact of the aforementioned reduction in premium funding for a large alternative market
program. A decrease in renewal rate and retention losses were partially offset by new business of $3.7 million in 2020. We
retained 100% of the 23 workers' compensation alternative market programs up for renewal during the year ended
December 31, 2020. During the second quarter of 2020, we added one new workers' compensation alternative market program
at Inova Re with $1.1 million in premiums written during the year ended December 31, 2020.
Our traditional and alternative market premiums written were impacted by reductions in payroll exposure and policy
cancellations related to the economic impact of COVID-19. Reductions in payroll exposure and policy cancellations related to
the economic impact of COVID-19 reduced premiums written by approximately $3.6 million for the year ended December 31,
2020. We expect continued downward pressure in future quarters on our workers' compensation premium resulting from further
reductions in insured payroll exposure; however, the length and magnitude of such changes depends on future developments,
which are highly uncertain and cannot be predicted.
91
New business, audit premium, retention and renewal price changes for both the traditional business and the alternative
market business are shown in the table below:
Year Ended December 31
2020
Alternative
Market
Business
Traditional
Business
Segment
Results
Traditional
Business
2019
Alternative
Market
Business
Segment
Results
($ in millions)
New business
$ 23.7
$
3.7
$ 27.4
$
27.0
$
3.8
$
30.8
$
(0.1)
(0.6)
Audit premium (including EBUB) $
Retention rate (1)
Change in renewal pricing (2)
(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium divided by all
annualized expiring premium subject to renewal. Our retention rate can be impacted by various factors, including
price or other competitive issues, insureds being acquired, or a decision not to renew based on our underwriting
evaluation.
(4%)
(4%)
(4%)
84%
84%
84%
(4%)
(5%)
(0.7)
91%
79%
2.0
3.7
$
$
$
$
5.7
83%
(4%)
(2) The pricing of our business includes an assessment of the underlying policy exposure and 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:
Year Ended December 31
($ in thousands)
2020
2019
Change
Premiums ceded to SPCs
$ 66,725 $ 79,799 $ (13,074)
(16.4%)
Premiums ceded to external reinsurers
Premiums ceded to unaffiliated captive insurers
Change in return premium estimate under external
reinsurance
12,472
2,762
13,633
2,449
(1,161)
313
(8.5%)
12.8%
(39)
328
(367)
(111.9%)
Total ceded premiums written
$ 81,920 $ 96,209 $ (14,289)
(14.9%)
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 and, to a limited extent,
to an unaffiliated captive insurer. The decrease in premiums ceded to SPCs during the year ended December 31, 2020 reflects
the reduction in alternative market gross premiums written as discussed above under the heading "Gross Premiums Written".
Under our external reinsurance agreement for traditional business, 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, subject to an AAD.
The AAD for the contract year effective May 1, 2019 was $3.9 million of incurred losses in excess of the $0.5 million per
occurrence retention, or approximately 2.1% of subject earned premium. Effective May 1, 2020, our primary reinsurance layer
was renewed at a slightly higher rate than the expiring year, with an increase in the AAD to 3.16% of subject earned premium
for incurred losses in excess of the per occurrence retention. Per our reinsurance agreements, we cede premiums related to our
traditional business on an earned premium basis. The decrease in premiums ceded to external reinsurers during the year ended
December 31, 2020 primarily reflected the decrease in traditional earned premium.
Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended
December 31, 2020 and 2019. The change in estimated return premium for the year ended December 31, 2020 reflected prior
year loss development on previously reported reinsured claims.
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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
2020
2019
Change
32.8%
34.2%
(1.4 pts)
24.6%
26.2%
(1.6 pts)
0.1%
1.4%
—%
0.1%
1.1%
0.2%
— pts
0.3 pts
(0.2 pts)
(0.3%)
(0.3%)
— pts
7.0%
6.9%
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. The ceded premiums ratio in
2020 primarily reflects the reinsurance rates in effect for the contract period beginning May 1, 2020.
Net Premiums Earned
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 and the unaffiliated captive insurer. 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, changes in
our EBUB estimate and premium adjustments related to retrospectively-rated policies. 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.
Net premiums earned were as follows:
($ in thousands)
2020
2019
Change
Gross premiums earned
$ 255,484 $ 287,409 $
(31,925)
(11.1%)
Less: Ceded premiums earned
83,712
98,169
(14,457)
(14.7%)
Net premiums earned
$ 171,772 $ 189,240 $
(17,468)
(9.2%)
Year Ended December 31
The decrease in net premiums earned during the year ended December 31, 2020 as compared to 2019 primarily reflected
the pro rata effect of a reduction in net premiums written during the preceding twelve months and, to a lesser extent, the
reduction in our EBUB estimate and the impact of retrospectively-rated policy adjustments. We reduced our EBUB estimate by
$1.3 million during 2020 which primarily reflected a reduction in earned payroll exposure. As a result of the economic impact
of COVID-19, we expect future reductions in payroll exposure related to in-force policies that could result in a significant
decrease in audit premium and our EBUB estimate. We will continue to monitor and adjust the estimate, if necessary, based on
changes in insured payrolls and economic conditions, as experience develops or new information becomes known; however, the
length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted.
There was no adjustment to our EBUB estimate during the year ended December 31, 2019. Premium adjustments related to
retrospectively-rated policies decreased premiums by 2.5 million and $2.1 million during the years ended December 31, 2020
and 2019, respectively.
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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 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
2020
2019
Change
64.9%
(4.1%)
69.0%
64.3%
(4.1%)
68.4%
0.6 pts
— pts
0.6 pts
The increase in the current accident year loss ratio for the year ended December 31, 2020 primarily reflected the
continuation of intense price competition and the resulting renewal rate decreases, partially offset by favorable claim trends,
including lower claims frequency and severity. As a result of the COVID-19 pandemic, legislative and regulatory bodies in
certain states have changed or are considering changes to compensability requirements and presumptions for certain types of
workers related to COVID-19 claims. These endeavors could have an adverse impact on the frequency and severity related to
COVID-19 claims. Furthermore, the current economic conditions resulting from the COVID-19 pandemic have introduced
significant risk of a prolonged recession, which could have an adverse impact on our return to wellness efforts and the ability of
injured workers to return to work, resulting in a potential reduction in favorable claim trends in future periods.
Calendar year incurred losses (excluding IBNR) ceded to our external reinsurers decreased $11.3 million for the year
ended December 31, 2020 as compared to 2019. Current accident year ceded incurred losses (excluding IBNR) decreased $8.2
million as compared to 2019. The decrease in ceded incurred losses reflects lower severity-related claim activity during 2020
and, on a calendar year basis, favorable development on prior year reinsured claims.
We recognized net favorable prior year development related to our previously established reserve of $7.0 million for the
year ended December 31, 2020 as compared to $7.8 million for 2019. The net favorable prior year reserve development for the
years ended December 31, 2020 and 2019 reflected overall favorable trends in claim closing patterns. Net favorable
development for the year ended December 31, 2020 primarily related to the 2014 through 2017 accident years. Net favorable
development for the year ended December 31, 2019 primarily related to the 2015 and 2016 accident years and included a fair
value adjustment of $1.6 million related to the amortization of purchase accounting. The fair value adjustment was fully
amortized as of December 31, 2019.
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses includes the amortization of commissions, premium taxes and
underwriting salaries, which are capitalized and deferred over the related workers’ compensation policy period, net of ceding
commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our contract
acquisition efforts. These expenses also include a management fee charged by our Corporate segment, which represents
intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily related to the
acquisition of Eastern by ProAssurance. The management fee is based on the extent to which services are provided to the
subsidiary and the amount of premium written by the subsidiary.
Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised
as follows:
($ in thousands)
2020
2019
Change
Year Ended December 31
DPAC amortization
Management fees
Other underwriting and operating expenses
SPC ceding commission offset
Total
$
31,547 $
34,338 $
(2,791)
(8.1%)
1,861
38,693
2,088
39,073
(227)
(380)
(15,652)
56,449 $
(17,979)
57,520 $
2,327
(1,071)
$
(10.9%)
(1.0%)
(12.9%)
(1.9%)
The decrease in DPAC amortization for the year ended December 31, 2020 as compared to 2019 primarily reflects the
decrease in net premiums earned. The decrease in other underwriting and operating expenses for the year ended December 31,
2020 as compared to 2019 primarily reflected a decrease in travel-related costs and a reduction in employer contributions to the
94
ProAssurance Savings Plan (see Note 17 of the Notes to Consolidated Financial Statements). The decrease in travel-related
costs in 2020 are directly attributable to COVID-19, as company business travel has been substantially reduced. The decrease in
other underwriting and operating expenses in 2020 was largely offset by costs related to the implementation of a new policy
administration and claims system and one-time costs of $0.9 million primarily comprised of employee severance costs
associated with the restructuring of our workers' compensation business in 2020.
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
decrease in SPC ceding commissions earned for the year ended December 31, 2020 as compared to 2019, primarily reflects the
decrease in alternative market ceded 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
2020
2019
Change
32.9%
30.4%
2.5 pts
3.2%
0.3%
0.1%
29.3%
2.8%
0.2%
(0.4%)
27.8%
0.4 pts
0.1 pts
0.5 pts
1.5 pts
Excluding the items noted in the table above, the increase in the expense ratio for the year ended December 31, 2020,
primarily reflected the decrease in net premiums earned and costs related to the implementation of a new policy administration
and claims system.
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Segment Results - Segregated Portfolio Cell Reinsurance
The Segregated Portfolio Cell Reinsurance segment includes the 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 16 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 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 results attributable to external cell
participants are reflected as an SPC dividend (expense) income in our Segregated Portfolio Cell Reinsurance segment. In
addition, our Segregated Portfolio Cell Reinsurance segment includes the investment results of the SPCs 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. As of December 31, 2020, there were 27 (24 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, 2020, 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.
Segment results reflects our share of the underwriting and investment results of the SPCs in which we participate, and
included the following:
($ in thousands)
2020
2019
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 U.S. federal income tax expense (1)(2)
SPC net results
SPC dividend (expense) income (3)
Segment results (4)
$
$
64,159 $
77,639 $
(13,480)
(17.4%)
66,352 $
78,563 $
(12,211)
(15.5%)
1,084
3,085
205
(29,605)
(20,709)
(1,746)
18,666
(14,304)
1,578
4,020
559
(52,412)
(23,201)
(1,059)
8,048
(4,579)
(494)
(935)
(354)
(31.3%)
(23.3%)
(63.3%)
22,807
(43.5%)
2,492
(10.7%)
(687)
64.9%
10,618
131.9%
(9,725)
212.4%
$
4,362 $
3,469 $
893
25.7%
Net loss ratio
Underwriting expense ratio (1)
44.6%
31.2%
66.7%
29.5%
(22.1 pts)
1.7 pts
(1) In our December 31, 2019 report on Form 10-K, underwriting, policy acquisition and operating expenses in 2019 included a provision for U.S.
federal income taxes of $1.1 million for SPCs at Inova Re that have elected to be taxed as U.S. taxpayers (see Footnote 2). Since this tax
provision was included as a component of underwriting, policy acquisition and operating expenses in 2019, it was also included in the
calculation of the underwriting expense ratio, which increased the 2019 ratio by 1.4 percentage points. Beginning in 2020, this tax provision is
now presented as a separate line on our Consolidated Statements of Income and Comprehensive Income as SPC U.S. federal income tax
expense as these U.S. federal income taxes do not represent underwriting expenses of the SPCs. We have recast prior periods to conform to this
new presentation, including the calculation of the underwriting expense ratio.
(2) Represents the provision for U.S. federal income taxes for SPCs at Inova Re, which have elected to be taxed as a U.S. corporation under
Section 953(d) of the Internal Revenue Code. U.S. federal income taxes are included in the total SPC net results and are paid by the individual
SPCs.
(3) Represents the net (profit) loss attributable to external cell participants.
(4) Represents our share of the net profit (loss) of the SPCs in which we participate.
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Premiums Written
Premiums in our Segregated Portfolio Cell Reinsurance segment are assumed from either our Workers' Compensation
Insurance or Specialty P&C segments. Premium volume is driven by five primary factors: (1) the amount of new business
written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and, for
workers' compensation business, (4) changes in payroll exposure and (5) audit premium.
Gross, ceded and net premiums written were as follows:
($ in thousands)
2020
2019
Change
Gross premiums written
Less: Ceded premiums written
Net premiums written
$ 72,843 $ 87,140 $ (14,297)
(16.4%)
8,684
9,501
(817)
(8.6%)
$ 64,159 $ 77,639 $ (13,480)
(17.4%)
Year Ended December 31
Gross Premiums Written
Gross premiums written reflected reinsurance premiums assumed by component as follows:
Year Ended December 31
($ in thousands)
2020
2019
Change
Workers' compensation
Healthcare professional liability
Other
$ 66,725 $ 79,799 $ (13,074)
(16.4%)
6,118
—
6,860
481
(742)
(481)
(10.8%)
nm
Gross Premiums Written
$ 72,843 $ 87,140 $ (14,297)
(16.4%)
Gross premiums written for the years ended December 31, 2020 and 2019 were primarily comprised of workers'
compensation coverages assumed from our Workers' Compensation Insurance segment. The decrease in gross premiums
written in 2020 as compared to 2019 primarily reflected the competitive workers’ compensation market conditions and the
resulting renewal rate decreases of 4%, retention losses and a decrease in audit premium. The decrease in the retention rate
during 2020 includes the impact of a reduction in premium funding for a large workers' compensation alternative market
program. We do not participate in this program; therefore, the reduction in premium funding had no effect on the segment
results for the year ended December 31, 2020. Healthcare professional liability gross premiums written decreased during 2020
as compared to 2019 due to retention losses driven by the loss of a large Senior Care policy that chose to utilize self-insurance,
partially offset by new business (see previous discussion under the heading "Gross Premiums Written" in our Segment Results -
Specialty Property & Casualty section). We retained 100% of the 22 workers' compensation programs and 3 healthcare
professional liability programs up for renewal during 2020. During the second quarter of 2020, we added one new alternative
market program at Inova Re with $1.1 million in premiums written during the year ended December 31, 2020.
Our workers’ compensation premiums written were impacted by reductions in payroll exposure and policy cancellations
related to the economic impact of COVID-19, and we expect continued downward pressure in future quarters on our workers'
compensation premium resulting from further reductions in insured payroll exposure; however, the length and magnitude of
such changes depends on future developments, which are highly uncertain and cannot be predicted.
97
New business, audit premium, retention and renewal price changes for the assumed workers' compensation premium is
shown in the table below:
($ in millions)
New business
Audit premium (including EBUB)
Retention rate (1)
Change in renewal pricing (2)
Year Ended December 31
2020
2019
$
$
3.7
(0.1)
$
$
3.8
2.0
84%
(4%)
91%
(5%)
(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
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)
2020
2019
Change
Ceded premiums written
$ 8,684 $ 9,501 $
(817)
(8.6%)
Year Ended December 31
For the workers' compensation business, each SPC has in place its own external reinsurance arrangements. The healthcare
professional liability business is assumed net of reinsurance from our Specialty P&C segment; therefore, there are no ceded
premiums related to the healthcare professional liability business reflected in the table above. The risk retention for each loss
occurrence for the workers' compensation business ranges from $0.3 million to $0.4 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. The
decrease in ceded premiums written in 2020, as compared to 2019, primarily reflected the decrease in workers' compensation
gross premiums written, partially offset by an increase in reinsurance rates for programs with renewal dates on or after May 1,
2020. External reinsurance rates vary based on the alternative market program.
Ceded Premiums Ratio
Ceded premiums ratio was as follows:
Ceded premiums ratio
Year Ended December 31
2020
13.0%
2019
11.9%
Change
1.1 pts
The above table reflects ceded premiums as a percent of gross premiums written for the workers' compensation business
only; healthcare professional liability business is assumed net of reinsurance, as discussed above. The ceded premiums ratio
reflects the weighted average reinsurance rates of all SPC programs. The increase in the ceded premiums ratio for the year
ended December 31, 2020 primarily reflects an increase in reinsurance rates for programs renewing on or after May 1, 2020 and
the reduction in premium funding for a large workers' compensation alternative market program (see previous discussion under
the heading "Gross Premiums Written"). The reinsurance costs associated with this program are fixed, which resulted in an
increase in the ceded ratio.
98
Net Premiums Earned
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.
Gross, ceded and net premiums earned were as follows:
($ in thousands)
2020
2019
Change
Gross premiums earned
$
75,112 $
88,304 $ (13,192)
(14.9%)
Less: Ceded premiums earned
8,760
9,741
(981)
(10.1%)
Net premiums earned
$
66,352 $
78,563 $ (12,211)
(15.5%)
Year Ended December 31
The decrease in net premiums earned during the year ended December 31, 2020 primarily reflected the pro rata effect of a
reduction in net premiums written during the preceding twelve months, including the reduction in premium funding for the
large workers' compensation alternative market program (see previous discussion under the heading "Gross Premiums
Written").
Net Investment Income and Net Realized Investment Gains (Losses)
Net investment income for the years ended December 31, 2020 and 2019 was primarily attributable to interest earned on
available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. We
recognized $3.1 million of net realized investment gains for the year ended December 31, 2020, which primarily reflected an
increase in the fair value on our equity portfolio due to an improvement in the global financial markets since the first quarter of
2020, which was depressed due to the onset of COVID-19. We recognized $4.0 million of net realized investment gains for the
year ended December 31, 2019 driven by changes in the fair value of our equity portfolio.
Losses and Loss Adjustment Expenses
The following table summarizes the calendar year net loss ratios by separating losses between the current accident year
and all prior accident years. 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 net loss ratios were affected
by a $10 million reserve that an SPC at Eastern Re established during the second quarter of 2019. This SPC had previously
assumed an errors and omissions liability 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 were attributable to the external cell participants as reflected in the SPC
dividend expense (income) and had no effect on our Segregated Portfolio Cell Reinsurance segment results for the year ended
December 31, 2019. Given the significance of this 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, 2020 and 2019 was 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
2020
As reported
44.6%
As
reported
66.7%
2019
E&O
reserve
impact
12.3 pts
Change
Adjusted
54.4%
As
reported
(22.1 pts)
Adjusted
(9.8 pts)
(25.0%)
69.6%
(12.9%)
79.6%
— pts
12.3 pts
(12.9%) (12.1 pts)
(10.0 pts)
67.3%
(12.1 pts)
2.3 pts
99
Excluding the impact of the errors and omissions liability policy, as previously discussed and as shown in the table above,
the current accident year net loss ratio increased 2.3 percentage points in 2020 as compared to 2019, primarily reflecting the
continuation of intense price competition and the resulting renewal rate decreases, partially offset by overall favorable claim
trends in the 2020 accident year. As a result of the COVID-19 pandemic, legislative and regulatory bodies in certain states have
changed or are considering changes to compensability requirements and presumptions for certain types of workers related to
COVID-19 claims. These endeavors could have an adverse impact on the frequency and severity related to COVID-19 claims.
Furthermore, the current economic conditions resulting from the COVID-19 pandemic have introduced significant risk of a
prolonged recession, which could have an adverse impact on our return to wellness efforts and the ability of injured workers to
return to work, resulting in a potential reduction in favorable claim trends in future periods.
Calendar year ceded incurred losses (excluding IBNR) decreased $10.2 million for the year ended December 31, 2020 as
compared to 2019. Current accident year ceded incurred losses (excluding IBNR) decreased $8.9 million for the year ended
December 31, 2020 as compared to 2019. The decrease in ceded incurred losses reflects lower severity-related claim activity
during 2020 and, on a calendar year basis, favorable development on prior year reinsured claims.
We recognized net favorable prior year reserve development of $16.5 million and $10.1 million for the years ended
December 31, 2020 and 2019, respectively. The net favorable prior year reserve development for 2020 included $12.1 million
related to the workers’ compensation business, which primarily reflected overall favorable trends in claim closing patterns in
the 2014 through 2019 accident years. In addition, net favorable prior year reserve development in 2020 included $4.4 million
related to the healthcare professional liability business.
Underwriting, Policy Acquisition and Operating Expenses
Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were
comprised as follows:
($ in thousands)
2020
2019
Change
DPAC amortization
$ 19,636 $ 21,717 $ (2,081)
(9.6%)
Other underwriting and operating expenses
1,073
1,484
(411)
(27.7%)
Total
$ 20,709 $ 23,201 $ (2,492)
(10.7%)
Year Ended December 31
DPAC amortization primarily represents 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 and bad debt expense. The
decrease in other underwriting and operating expenses for the year ended December 31, 2020 as compared to 2019 primarily
reflected recoveries of premiums receivables previously written off, which resulted in an adjustment to our allowance for
expected credit losses.
Underwriting Expense Ratio (the Expense Ratio)
The underwriting expense ratio included the impact of the following:
Underwriting expense ratio, as reported
Less: impact of audit premium on expense ratio
Underwriting expense ratio, excluding the effect
of audit premium
Year Ended December 31
2020
31.2%
0.1%
2019
29.5%
Change
1.7 pts
(0.7%)
0.8 pts
31.1%
30.2%
0.9 pts
Excluding the effect of audit premium, the underwriting expense ratio primarily reflected the weighted average ceding
commission percentage of all SPC programs. The increase in the expense ratio for the year ended December 31, 2020 as
compared to 2019 was driven by the effect of a reduction in net premiums earned, as previously discussed. Additionally, the
increase in the expense ratio in 2020 reflected the impact of the reduction in premium funding for a large workers'
100
compensation alternative market program as the ceding commissions associated with this program are fixed and do not vary
directly with changes in premium (see previous discussion under the heading "Gross Premiums Written").
SPC U.S. Federal Income Tax Expense
The SPCs at Inova Re have made a 953(d) election under the U.S. Internal Revenue Code and are subject to U.S. federal
income tax. U.S. federal income taxes incurred totaled $1.7 million and $1.1 million for the years ended December 31, 2020
and 2019, respectively. The increase in the federal income tax provision for the year ended December 31, 2020 as compared to
2019 reflects an increase in taxable income for the Inova Re SPCs.
101
Segment Results - Lloyd's Syndicates
Our Lloyd's Syndicates segment includes the results from our participation in certain Syndicates at Lloyd's of London. In
addition to our participation in Syndicate results, we have investments in and other obligations to our Lloyd's Syndicates
consisting of a Syndicate Credit Agreement and FAL requirements. For the 2020 underwriting year, our FAL was comprised of
investment securities and cash and cash equivalents deposited with Lloyd's which at December 31, 2020 had a fair value of
approximately $106.2 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements. During the third
quarter of 2020, we received a return of approximately $32.3 million of cash and cash equivalents from our FAL balances given
the reduction in our participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%.
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. 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. As previously discussed, we decreased our
participation in the results of Syndicate 1729 for the 2020 underwriting year to reduce our exposure and the associated earnings
volatility. Due to the quarter lag, this reduced participation was not reflected in our results until the second quarter of 2020.
Syndicate 1729 had a maximum underwriting capacity of £135 million (approximately $185 million based on December 31,
2020 exchange rates) for the 2020 underwriting year, of which £39 million (approximately $53 million based on December 31,
2020 exchange rates) was our allocated underwriting capacity. To support and grow our core insurance operations, we
decreased our participation in the results of Syndicate 1729 for the 2021 underwriting year to 5% from 29% which, due to the
quarter lag, will not be reflected in our results until the second quarter of 2021. Syndicate 1729's maximum underwriting
capacity for the 2021 underwriting year is £185 million (approximately $253 million based on December 31, 2020 exchange
rates), of which £9 million (approximately $13 million based on December 31, 2020 exchange rates) is our allocated
underwriting capacity.
Lloyd's Syndicate 6131. We provide capital to an SPA, Syndicate 6131, which focuses on contingency and specialty
property business, primarily for risks within the U.S. as well as international markets. For the 2020 underwriting year, we were
the sole (100%) capital provider to Syndicate 6131 which had a maximum underwriting capacity of £12 million (approximately
$16 million based on December 31, 2020 exchange rates). As an SPA, Syndicate 6131 underwrites on a quota share basis with
Syndicate 1729. Effective July 1, 2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an
unaffiliated insurer. Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729
to the unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and we decreased our participation in the results
of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due to the quarter lag, this reduced participation will not
be reflected in our results until the second quarter of 2021. Syndicate 6131's maximum underwriting capacity for the 2021
underwriting year is £20 million (approximately $27 million based on December 31, 2020 exchange rates), of which £10
million (approximately $14 million based on December 31, 2020 exchange rates) is our allocated underwriting capacity.
102
In addition to the results of our participation in Lloyd's Syndicates, as discussed above, our Lloyd's Syndicates segment
also includes 100% of the results of our wholly owned subsidiaries that support our operations at Lloyd's. For the years ended
December 31, 2020 and 2019, the results of our Lloyd's Syndicates segment were as follows:
($ 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 results
Net loss ratio
Underwriting expense ratio
Premiums Written
Year Ended December 31
2020
$ 84,718
(17,066)
$ 67,652
$ 77,226
4,128
988
51
(50,216)
(30,136)
29
2,070
$
2019
$ 110,905
(23,802)
$ 87,103
$ 80,671
4,551
768
(573)
(47,369)
(34,711)
—
3,337
$
$
$
$
$
Change
(26,187)
6,736
(19,451)
(3,445)
(423)
220
624
(2,847)
4,575
29
(1,267)
(23.6%)
(28.3%)
(22.3%)
(4.3%)
(9.3%)
28.6%
108.9%
6.0%
(13.2%)
nm
(38.0%)
65.0 %
39.0 %
6.3 pts
58.7 %
43.0 % (4.0 pts)
Changes in our premium volume within our Lloyd's Syndicates segment are driven by five primary factors: (1) changes in
our participation in the Syndicates, (2) the amount of new business and the channels in which the business is written, (3) our
retention of existing business, (4) 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 (5) the timing of premium written through multi-period
policies.
Gross Premiums Written
Gross premiums written in 2020 consisted of property insurance coverages (39% of total gross premiums written),
casualty coverages (30%), catastrophe reinsurance coverages (13%), specialty property coverages (11%), contingency
coverages (4%) and property reinsurance coverages (3%). The decrease in gross premiums written in 2020 as compared to 2019
was driven by our decreased participation in the results of Syndicate 1729, partially offset by volume increases on renewal
business and renewal pricing increases, primarily on property insurance and casualty coverages, as well as new business
written, also primarily property insurance and casualty coverages. In addition, gross premiums written in 2020 included a
binder adjustment on a prior year of account, which reduced written and earned premium in the current period. See further
discussion on these binder adjustments in our Critical Accounting Estimates section under the heading "Lloyd's Premium
Estimates."
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. As previously discussed,
for the second half of 2020 Syndicate 6131 utilized external quota share reinsurance to manage the net loss exposure on the
specialty property and contingency coverages it assumed from Syndicate 1729 by ceding essentially half of the premium
assumed to an unaffiliated insurer; this agreement was non-renewed on January 1, 2021. Due to the quarter lag, the effect of this
reinsurance arrangement was not reflected in our results until the fourth quarter of 2020. Ceded premiums written decreased for
the year ended December 31, 2020 as compared to 2019 primarily driven by our decreased participation in the results of
Syndicate 1729 and, to a lesser extent, the effect of a revision to the Syndicates' estimates of premiums due to reinsurers during
the first quarter of 2019. The decrease in ceded premiums written in 2020 as compared to 2019 was partially offset by the
impact of premiums ceded under Syndicate 6131's six-month quota share agreement and, to a lesser extent, an increase in
estimated reinsurance reinstatement premiums of $1.2 million during the fourth quarter of 2020 triggered by certain property
and catastrophe related losses exceeding specified levels in the reinsurance agreement.
103
Net Premiums Earned
Net premiums earned consist of gross premiums earned less the portion of earned premiums that the Syndicates cede to
reinsurers for their assumption of a portion of losses. Premiums written through open-market channels are generally earned pro
rata over the entire policy period, which is predominately twelve months, whereas premiums written through delegated
underwriting authority arrangements are earned over twenty-four months. Therefore, net premiums earned is affected by shifts
in the mix of policies written between the open-market and delegated underwriting authority arrangements. Additionally, net
premiums earned consists of a mix of policies earned from different open underwriting years. As previously discussed, we
participate to a varying degree in each open underwriting year which may cause fluctuations in premiums earned. Furthermore,
fluctuations in premiums earned tend to lag those of premiums written. Premiums for certain policies and assumed reinsurance
contracts are reported subsequent to the coverage period and/or may be subject to adjustment based on loss experience. These
premium adjustments are earned when reported, which can result in further fluctuation in earned premium.
Gross, ceded and net premiums earned were as follows:
($ in thousands)
2020
2019
Change
Gross premiums earned
$
98,990 $ 101,222 $
(2,232)
Less: Ceded premiums earned
21,764
20,551
1,213
Net premiums earned
$
77,226 $
80,671 $
(3,445)
(2.2%)
5.9%
(4.3%)
Year Ended December 31
The decrease in gross premiums earned for the year ended December 31, 2020 as compared to 2019 was driven by our
decreased participation in Syndicate 1729, which was not reflected in our results until the second quarter of 2020 and, to a
lesser extent, a binder adjustment which reduced both written and earned premium in the current period (see previous
discussion under the heading "Gross Premiums Written"). The decrease in gross premiums earned in 2020 was partially offset
by the pro rata effect of higher premiums written at the Syndicates during the preceding twelve months, primarily property
insurance and casualty coverages.
The increase in ceded premiums earned during 2020 as compared to 2019 was driven by the aforementioned reinstatement
premiums earned of $1.2 million during the fourth quarter of 2020 and, to a lesser extent, the pro rata effect of an increase in
written premiums ceded under reinsurance arrangements during the preceding twelve months, partially offset by our decreased
participation in Syndicate 1729.
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 mix of earned premium and 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
2020
2019
Change
65.0%
0.8%
64.2%
58.7%
0.5%
58.2%
6.3 pts
0.3 pts
6.0 pts
For the year ended December 31, 2020, the current accident year net loss ratio increased 6.0 percentage points as
compared to 2019. The increase in the current accident year net loss ratio was driven by certain property and catastrophe related
losses and, to a lesser extent, contingency related losses incurred during 2020.
104
We recognized $0.6 million and $0.4 million of unfavorable prior year development for the years ended December 31,
2020 and 2019, respectively. The unfavorable prior year development for the year ended December 31, 2020 was driven by
higher than expected losses and development on certain large claims, primarily catastrophe related losses, which resulted in
unfavorable development with respect to a previous year of account.
We have exposures to potential COVID-19 claims through our participation in Syndicates 1729 and 6131. During 2020,
we recognized losses related to COVID-19 of approximately $3.6 million, net of reinsurance, primarily in Syndicate 6131's
contingency and Syndicate 1729's casualty books of business. We are closely monitoring potential amendments in legislation
and court decisions that could impact the claims position; however, to date, legislative attempts have been unsuccessful in most
territories in which the Syndicates write the majority of their business. See previous discussion in Part I under the heading
"Insurance Regulatory Matters- COVID-19."
Underwriting, Policy Acquisition and Operating Expenses
Underwriting, policy acquisition and operating expenses decreased by $4.6 million for the year ended December 31, 2020
as compared to 2019 and reflected our decreased participation in Syndicate 1729 and, to a lesser extent, the effect of higher
operational expenses incurred associated with establishing Syndicate 6131 during 2019.
For the year ended December 31, 2020, the underwriting expense ratio decreased by 4.0 percentage points as compared to
2019 driven by lower operating expenses due to our reduced participation in Syndicate 1729, partially offset by a decrease in
net premiums earned, as previously discussed. Operating expenses incurred during 2020 primarily were related to the 2020
underwriting year for which our participation is 29%, whereas the net premiums earned during the same period also includes
premium from other open underwriting years in which we participate at a higher degree.
Investments
The change in net investment income in 2020 as compared to 2019 was primarily attributable to interest earned on our
FAL investments, which primarily includes investment-grade corporate debt securities. During the second quarter of 2020,
certain corporate debt securities included in our FAL investments were liquidated. During the third quarter of 2020,
approximately $32.3 million of cash and cash equivalents was returned to ProAssurance, as previously discussed, which will
continue to impact the segment's net investment income in future periods. 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
The results of this segment are subject to U.K. income tax law.
105
Segment 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 16 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 results for our Corporate segment were net earnings of $71.4 million and
$129.7 million for the years ended December 31, 2020 and 2019, respectively, and included the following:
($ in thousands)
2020
2019
Change
Net investment income
$ 66,786 $ 87,140 $ (20,354)
Equity in earnings (loss) of unconsolidated subsidiaries
$ (11,921) $ (10,061) $
(1,860)
Year Ended December 31
Net realized gains (losses)
Other income
Operating expense
Interest expense
$ 11,605 $ 55,086 $ (43,481)
$
2,531 $
3,478 $
(947)
$ 23,429 $ 19,146 $
4,283
$ 15,503 $ 16,636 $
(1,133)
(23.4%)
(18.5%)
(78.9%)
(27.2%)
22.4%
(6.8%)
Income tax expense (benefit)
$ (41,300) $ (29,808) $ (11,492)
(38.6%)
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)
2020
2019
Change
$ 64,338 $ 66,862 $
(2,524)
Year Ended December 31
4,369
2,209
2,023
17,650
(13,281)
6,635
2,017
(4,426)
6
(129)
(6,153)
(6,024)
(3.8%)
(75.2%)
(66.7%)
0.3%
2.1%
$ 66,786 $ 87,140 $ (20,354)
(23.4%)
Fixed maturities
Equities
Short-term investments, including Other
BOLI
Investment fees and expenses
Net investment income
Fixed Maturities
Income from our fixed maturities decreased during 2020 as compared to 2019 primarily due to lower yields from our
corporate debt securities, partially offset by higher average investment balances. Average investment balances were
approximately 5% higher for the year ended December 31, 2020 as compared to 2019.
Average yields for our fixed maturity portfolio were as follows:
Average income yield
Average tax equivalent income yield
Equities
Year Ended December 31
2020
3.1%
3.1%
2019
3.4%
3.4%
Income from our equity portfolio decreased during 2020 as compared to 2019 which reflected a decrease in our allocation
to this asset category.
106
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 decreased during 2020 primarily attributable to lower
yields given the actions taken by the Federal Reserve to aggressively reduce interest rates in response to COVID-19.
Equity in Earnings (Loss) of Unconsolidated Subsidiaries
Equity in earnings (loss) of unconsolidated subsidiaries was comprised as follows:
($ in thousands)
2020
2019
Change
All other investments, primarily investment fund LPs/LLCs
$
7,855 $ 10,842 $
(2,987)
(27.6%)
Tax credit partnerships
(19,776)
(20,903)
1,127
5.4%
Equity in earnings (loss) of unconsolidated subsidiaries
$ (11,921) $ (10,061) $
(1,860)
(18.5%)
Year Ended December 31
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, typically following the end of a reporting period. The decrease in our investment
results from our portfolio of investments in LPs/LLCs during 2020 as compared to 2019 was due to lower reported earnings
from several LPs/LLCs driven by the volatility in the global financial markets related to COVID-19.
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 a historic tax
credit partnership. 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 partnership is
short-term in nature and the remaining operating losses, up to our total current funded commitment, were recognized during the
second quarter of 2020. The results from our tax credit partnership investments for the year ended December 31, 2020 reflected
lower partnership operating losses as compared to 2019. In addition, based on operating results received, we increased our
estimate of operating losses by $4.3 million and $3.0 million for the years ended December 31, 2020 and 2019, respectively.
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above, reduced
our tax expense in 2020 and 2019 as follows:
(In millions)
Tax credits recognized during the period
Tax benefit of tax credit partnership operating losses
Year Ended December 31
2020
2019
$
$
17.9 $
4.2 $
21.9
4.4
Due to the expected NOL for the year ended December 31, 2020 and realized NOL for the year ended December 31,
2019, the tax credits generated from our tax credit partnership investments of $17.9 million and $18.2 million, respectively,
were deferred and are expected to be utilized in future periods. See further discussion in Note 5 of the Notes to Consolidated
Financial Statements.
Tax credits provided by the underlying projects of our historic tax credit partnership 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.
107
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
2020
2019
$
$
$
66,786 $
87,140
(11,921)
(10,061)
54,865 $
77,079
56,088 $
78,946
$
54,865 $
77,079
595
538
90
—
842
536
489
—
Pro forma tax-equivalent investment result
$
56,088 $
78,946
*Due to the expected NOL for the year ended December 31, 2020 and realized NOL for the year ended
December 31, 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 2020.
108
Net Realized Investment Gains (Losses)
The following table provides detailed information regarding our net realized investment gains (losses).
Total impairment losses
Corporate debt
(In thousands)
Portion of impairment losses recognized in other comprehensive income before
taxes:
Corporate debt
Net impairment losses recognized in earnings
Gross realized gains, available-for-sale fixed maturities
Gross realized (losses), available-for-sale fixed maturities
Net realized gains (losses), equity investments
Net realized gains (losses), other investments
Change in unrealized holding gains (losses), equity investments
Change in unrealized holding gains (losses), convertible securities, carried at fair
value as a part of other investments
Other
Year Ended December 31
2020
2019
$
(1,745) $
(978)
237
(1,508)
13,436
(2,499)
12,965
3,883
(18,926)
3,850
404
227
(751)
3,628
(551)
16,612
1,626
30,801
3,653
68
Net realized investment gains (losses)
$ 11,605 $ 55,086
For the year ended December 31, 2020, we recognized $1.5 million of credit-related impairment losses in earnings and a
nominal amount of non-credit impairment losses in OCI. The credit-related impairment losses recognized in 2020 primarily
related to corporate bonds in the energy and consumer sectors. Additionally, 2020 included credit-related impairment losses
related to four corporate bonds in various sectors, which were sold during 2020. The non-credit impairment losses recognized
during 2020 related to three corporate bonds in the energy and consumer sectors. For the year ended December 31, 2019, we
recognized credit-related impairment losses in earnings of $0.8 million and a nominal amount of non-credit impairment losses
in OCI, both of which related to three corporate bonds in the energy and consumer sectors.
We recognized $11.6 million of net realized investment gains for the year ended December 31, 2020, driven primarily by
realized gains on the sale of certain available-for-sale fixed maturities and equity investments, partially offset by unrealized
holding losses resulting from decreases in the fair value on our equity portfolio due to the volatility in the global financial
markets related to COVID-19. For the year ended December 31, 2019, we recognized $55.1 million of net realized investment
gains driven by both realized gains from the sale of equity investments and unrealized holding gains on our equity portfolio due
to the improvement in the market since December 31, 2018, which caused our equity securities to increase in value. The most
significant sectors that benefited from the improvement in the market were the financial and energy sectors.
109
Operating Expenses
Corporate segment operating expenses were comprised as follows:
($ in thousands)
2020
2019
Change
Year Ended December 31
Operating expenses
Management fee offset
Segment Total
$ 37,562 $ 34,717 $
(14,133)
(15,571)
$ 23,429 $ 19,146 $
2,845
1,438
4,283
8.2%
(9.2%)
22.4%
Operating expenses increased during the year ended December 31, 2020 as compared to 2019 primarily due to an increase
in professional fees and, to a lesser extent, an increase in share-based compensation expenses. The increase in professional fees
in 2020 was driven by an increase in transaction-related costs associated with our planned acquisition of NORCAL (see Note 9
of the Notes to Consolidated Financial Statements) and corporate legal expenses. The increase in share-based compensation
expenses in 2020 as compared to 2019 was primarily attributable to the effect of a decrease in the value of projected awards
during 2019 based upon the decline of one of the associated performance metrics. In addition, the increase in operating
expenses in 2020 as compared to 2019 included one-time costs of $0.5 million primarily comprised of employee severance and
early retirement benefits granted to certain employees in 2020. The increase in operating expenses in 2020 was partially offset
by a decrease in various other operational expenses, primarily employer contributions to the ProAssurance Savings Plan (see
Note 17 of the Notes to Consolidated Financial Statements) and, to a lesser extent, travel-related costs as a result of the
COVID-19 pandemic.
Operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments are charged a
management fee by the Corporate segment for services provided to these subsidiaries. The management fee is based on the
extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary. Under the
arrangement, the expenses associated with such services are reported as expenses of the Corporate segment, and the
management fees charged are reported as an offset to Corporate operating expenses. While the terms of the arrangement were
consistent between 2019 and 2020, fluctuations in the amount of premium written by each subsidiary can result in
corresponding variations in the management fee charged to each subsidiary during a particular period.
Interest Expense
Consolidated interest expense for the years ended December 31, 2020 and 2019 was comprised as follows:
($ in thousands)
2020
2019
Change
Year Ended December 31
Senior Notes due 2023
$ 13,429 $ 13,429 $
Revolving Credit Agreement (including fees and amortization)
Mortgage Loans (including amortization)*
(Gain)/loss on interest rate cap
Interest expense
831
812
431
645
1,438
1,124
—
186
(626)
(693)
—%
28.8%
(43.5%)
(61.7%)
$ 15,503 $ 16,636 $
(1,133)
(6.8%)
* 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 decreased during 2020 as compared to 2019 driven by the change in the fair value of our
interest rate cap and lower interest expense on our Mortgage Loans. The interest rate cap is designated as an economic hedge of
interest rate risk associated with our variable rate Mortgage Loans. Our Mortgage Loans accrue interest at three-month LIBOR
plus 1.325%, and the decrease in interest expense during 2020 as compared to 2019 was primarily due to a decrease in the
average three-month LIBOR. Interest expense on our Revolving Credit Agreement for the years ended December 31, 2020 and
2019 primarily reflected unused commitment fees as there were no outstanding borrowings during either period. See further
discussion of our interest rate cap agreement in Note 2 and further discussion of our outstanding debt in Note 11 of the Notes to
Consolidated Financial Statements.
110
Taxes
Tax expense allocated to our Corporate segment includes U.S. tax only, which would include U.S. tax expense incurred
from our corporate membership in Lloyd's of London. The U.K. tax expense incurred by the U.K. based subsidiaries of our
Lloyd's Syndicates segment is allocated to that segment. The SPCs at Inova Re, one of our Cayman Islands reinsurance
subsidiaries, have each made a 953(d) election under the U.S. Internal Revenue Code and are subject to U.S. federal income
tax; therefore, tax expense allocated to our Corporate segment also includes tax expense incurred from any SPC at Inova Re in
which we have a participation interest of 80% or greater as those SPCs are required to be included in our consolidated tax
return. Consolidated tax expense (benefit) reflects the tax expense (benefit) of both segments, as shown in the table below:
(In thousands)
Year Ended December 31
2020
2019
Corporate segment income tax expense (benefit)
$ (41,300) $ (29,808)
Lloyd's Syndicates segment income tax expense (benefit)
(29)
—
Consolidated income tax expense (benefit)
$ (41,329) $ (29,808)
Listed below are the primary factors affecting our consolidated effective tax rate in 2020 and 2019.
($ in thousands)
Income tax
(benefit) expense Rate Impact
Income tax
(benefit) expense
Rate Impact
Year Ended December 31
2020
2019
Computed "expected" tax expense (benefit) at
statutory rate
Tax-exempt income (1)
Tax credits
Non-U.S. operating results
Tax deficiency (excess tax benefit) on share-based
compensation
Tax rate differential on loss carryback
Goodwill impairment (2)
Provision-to-return differences
Change in uncertain tax positions
State income taxes
Benefit from amended returns
Other
$
(45,582)
21.0% $
(976)
(17,876)
(1,307)
457
(7,758)
31,413
1,217
(1,674)
(561)
—
1,318
0.4%
8.2%
0.6%
(0.2%)
3.6%
(14.5%)
(0.5%)
0.8%
0.3%
—%
(0.7%)
(6,049)
(1,528)
(21,933)
(1,447)
99
(3,400)
—
3,595
1,956
(376)
(550)
(175)
21.0%
5.3%
76.1%
5.0%
(0.3%)
11.8%
—%
(12.4%)
(6.8%)
1.3%
1.9%
0.6%
Total income tax expense (benefit)
$
(41,329)
19.0% $
(29,808)
103.5%
(1) Includes tax-exempt interest, dividends received deduction and change in cash surrender value of BOLI.
(2) Represents the tax impact of the impairment of non-deductible goodwill in relation to the Specialty P&C reporting unit during
the third quarter of 2020. See further discussion on the impairment charge under the heading "Goodwill / Intangibles" in the
Critical Accounting Estimates section.
Our effective tax rates for 2020 and 2019, 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 benefit recognized from the tax credits transferred
to us from our tax credit partnership investments. Tax credits recognized in 2020 were $17.9 million as compared to
$21.9 million for 2019. While projected tax credits for 2020 are less than 2019, they continue to have a significant impact on
the effective tax rate for 2020. Additionally, our effective tax rates in both 2020 and 2019 were impacted by provision-to-return
differences. For 2020, these differences primarily reflected the additional tax rate differential of 14% on the carryback of the
2019 NOL to the 2014 tax year which was lower than the previously estimated tax benefit. For 2019, these differences
primarily reflected a lower amount of tax credits recognized for the 2018 tax year than the previously estimated tax benefit.
Furthermore, our pre-tax loss in 2020 included a $161.1 million goodwill impairment recognized in relation to the Specialty
P&C reporting unit during the third quarter of 2020. Of the $161.1 million goodwill impairment, $149.6 million was non-
deductible for which no tax benefit was recognized, while the remaining $11.5 million was deductible for which a 21% tax
benefit was recognized on the related tax amortization. Consequently, the total impact of the goodwill impairment on the
effective tax rate in 2020 was approximately 14.5%. See further discussion on this goodwill impairment in Notes 1 and 6 of the
Notes to Consolidated Financial Statements. Our effective tax rate for the year ended December 31, 2020 also includes the
111
additional tax rate differential of 14% on the carryback of the 2020 and 2019 NOLs to the 2015 and 2014 tax years,
respectively, as a result of changes made by the CARES Act to the NOL provisions of the tax law.
112
Results of Operations - Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Other than as described below, there have been no other significant retrospective revisions in the presentation of the
changes in the financial condition, results of operations and cash flows for the year ended December 31, 2019 as compared to
the year ended December 31, 2018 as disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of ProAssurance's December 31, 2019 report on Form 10-K.
Segment Results - Specialty Property & Casualty
As previously discussed, we reorganized our presentation of gross premiums written by component and related metrics
during the second quarter of 2020 to better align with the current internal management reporting structure within the Specialty
P&C segment. All below information has been recast to conform to the current period presentation.
Gross Premiums Written
Gross premiums written by component were as follows:
($ in thousands)
2019
2018
Change
Year Ended December 31
Professional Liability
HCPL
Standard Physician(1)(10)
Twelve month term
Twenty-four month term
Total Standard physician
Specialty
Custom Physician(2)(10)
Hospitals and Facilities(3)
Senior Care(4)(10)
Reinsurance (assumed)
Loss portfolio transfers (retroactive)(5)
Total Specialty
Total HCPL
Small Business Unit(6)
Tail Coverages(5)(7)
Total Professional Liability
Medical Technology Liability(8)
Other(9)
Total
$ 217,110 $ 222,849 $
(5,739)
(2.6%)
26,863
22,171
4,692
21.2%
243,973
245,020
(1,047)
(0.4%)
86,743
47,454
21,484
11,805
900
168,386
412,359
106,355
21,724
62,452
46,415
23,837
11,524
18,708
162,936
407,956
108,643
25,579
24,291
1,039
38.9%
2.2%
(2,353)
(9.9%)
281
2.4%
(17,808)
(95.2%)
5,450
4,403
3.3%
1.1%
(2,288)
(2.1%)
(3,855)
(15.1%)
540,438
542,178
(1,740)
(0.3%)
35,128
2,134
34,528
490
600
1.7%
1,644
335.5%
$ 577,700 $ 577,196 $
504
0.1%
(1) Standard Physician premium was our greatest source of premium revenues in both 2019 and 2018 and is predominately
comprised of twelve month term policies. The decrease in twelve month term policies in 2019 was driven by retention
losses, partially offset by an increase in renewal pricing and, to a lesser extent, new business written. The lower retention
in 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. Renewal pricing increases in 2019
are reflective of our concern about increases in loss severity. 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 2018.
(2) Custom Physician premium includes large complex physician groups, multi-state physician groups and non-standard
physicians and is written primarily on an excess and surplus lines basis. The increase in premium in 2019 as compared to
2018 included timing differences of $5.6 million primarily related to the prior year renewal of certain policies. Excluding
the effect of these timing differences, Custom Physician premium increased $18.7 million as compared to 2018. The
remaining increase was primarily due new business written, including the addition of a $7.2 million policy, an increase in
113
exposure related to three policies totaling $5.2 million and, to a lesser extent, renewal price increases. Renewal pricing
increases during 2019 reflect the rising loss cost environment. The increase in premium in 2019 was partially offset by
retention losses which reflects 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.
(3) Hospitals and Facilities premium (which includes hospitals, surgery centers and miscellaneous medical facilities)
increased in 2019 as compared to 2018 primarily due new business written and renewal price increases, largely offset by
retention losses. Renewal pricing increases in 2019 reflect rate increases and contract modifications that we believe are
appropriate given the current loss environment. Retention losses in 2019 were driven by our decision not to renew certain
products and, to a lesser extent, the loss of a $1.4 million policy 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.
(4) Senior Care premium includes facilities specializing in long term residential care primarily for the elderly ranging from
independent living through skilled nursing. Our Senior Care premium decreased in 2019 as compared to 2018 primarily
due to retention losses, partially offset by new business written and, to a lesser extent, renewal pricing increases.
Retention losses in 2019 were driven by our decision not to renew certain classes of Senior Care business based on our
expectations of poor loss performance and, to a lesser extent, the loss of a $0.3 million policy as a result of rate increases.
Renewal price increases in 2019 reflect rate increases where we believe appropriate given the loss environment in this
space.
(5) 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
further discussion in footnote 7 that follows.
(6) Our Small Business Unit is primarily comprised of premium associated with podiatrists, legal professionals, dentists and
chiropractors. Our Small Business Unit premium decreased in 2019 as compared to 2018 driven by retention losses,
partially offset by an increase in renewal pricing and, to a lesser extent, new business written. The increase in renewal
pricing was primarily the result of an increase in the rate charged for certain renewed policies in select states.
(7) 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.
(8) Our Medical Technology Liability 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.
(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 $1.5 million specialty contractual liability policy.
114
(10) Certain components of our gross premiums written include alternative market premiums. We currently cede either all or a
portion of the alternative market premium, net of reinsurance, to three SPCs of our wholly owned Cayman Islands
reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance
segment. The portion not ceded to the SPCs is retained within our Specialty P&C segment.
($ in millions)
2019
2018
Change
Year Ended December 31
Standard Physician
Custom Physician
Senior Care
Total
$
1.4 $
1.4 $
0.2
6.2
0.2
4.2
$
7.8 $
5.8 $
—
—
2.0
2.0
—%
—%
47.6%
34.5%
The increase in our alternative market Senior Care 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.
The change in renewal pricing for our Specialty P&C segment, including by major component, was as follows:
Specialty P&C segment
HCPL
Standard Physician(1)
Specialty(1)
Total HCPL
Small Business Unit(1)
Medical Technology Liability(1)
Year Ended
December 31
2019
6%
8%
10%
8%
2%
2%
(1) See Gross Premiums Written section for further explanation of changes in renewal pricing.
New business written by major component on a direct basis was as follows:
(In millions)
Year Ended December 31
2019
2018
HCPL
Standard Physician
Specialty
Total HCPL
Small Business Unit
Medical Technology Liability
Total
$
9.2 $
25.0
34.2
4.2
4.2
$
42.6 $
11.0
28.0
39.0
5.9
3.0
47.9
115
Retention for our Specialty P&C segment, including by major component, was as follows:
Specialty P&C segment
HCPL
Standard Physician(1)
Specialty(1)
Total HCPL
Small Business Unit
Medical Technology Liability
Year Ended December 31
2019
2018
86 %
89 %
87 %
70 %
81 %
92 %
88 %
89 %
85 %
88 %
90 %
87 %
(1) See Gross Premiums Written section for further explanation of retention decline in 2019.
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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. Future
market interest rates are particularly uncertain at this time given the abrupt interest rate cuts made by the Federal Reserve in
response to the COVID-19 pandemic. 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, 2020 and December 31, 2019. 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, 2020
Fair Value:
Fixed maturities, available-for-sale:
U.S. Treasury obligations
$
113 $
110 $
107 $
104 $
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
13
361
1,427
704
13
347
1,377
690
12
333
1,329
677
12
320
1,284
659
102
12
308
1,241
639
Total fixed maturities, available-for-sale
$
2,618 $
2,537 $
2,458 $
2,379 $
2,302
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
2.65
1.80
4.07
3.62
2.29
3.27
2.60
1.77
4.01
3.52
2.23
3.19
2.56
2.11
3.96
3.44
2.34
3.16
2.51
2.99
3.91
3.40
2.86
3.28
2.46
3.14
3.88
3.35
3.21
3.34
117
($ 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
U.S. Government-sponsored enterprise obligations
State and municipal bonds
Corporate debt
Asset-backed securities
$
117 $
113 $
111 $
108 $
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
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, 2020, 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, 2020 were 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 2 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, 2020, no borrowings were outstanding under our Revolving Credit Agreement.
118
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, 2020, 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, 2020, our premiums receivable was
approximately $201 million, net of an allowance for expected credit losses of approximately $6 million. See Note 1 of the
Notes to Consolidated Financial Statements for further information on our allowance for expected credit losses related to our
premiums receivable. Our receivables from reinsurers (with regard to both paid and unpaid losses) approximated $399 million
at December 31, 2020 and $403 million at December 31, 2019. We monitor the credit risk associated with our reinsurers using
publicly available financial and rating agency data. We have not historically experienced material credit losses due to the
financial condition of a reinsurer, and as of December 31, 2020 our expected credit losses associated with our receivables from
reinsurers were nominal in amount. During the year ended December 31, 2020, we have received and granted requests for
premium relief for certain insureds that have been adversely impacted by the recent COVID-19 pandemic in the form of either
premium credits or premium deferrals. These efforts, along with the recent economic disruptions caused by COVID-19, may
result in future increases in our allowance for expected credit losses associated with our premiums and reinsurance receivables.
Equity Price Risk
At December 31, 2020, the fair value of our equity investments, excluding our equity investments in bond investment
funds as discussed in the following paragraph, was $38 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. Disruptions in global financial markets related to
COVID-19 have resulted in volatility in the fair value of our equity securities during 2020. We cannot predict the level of
market disruption and subsequent declines in fair value that may occur should the COVID-19 pandemic and its related macro-
economic impacts continue for an extended period of time. The weighted average beta of this group of securities was 1.15. 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 11.5% to $42 million. Conversely, a 10% decrease in the S&P 500 Index would imply a decrease of
11.5% in the fair value of these securities to $34 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.
119
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2020 and December 31, 2019
Consolidated Statements of Changes in Capital - Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 2020, 2019
and 2018
Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
125
127
128
129
130
132
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, 2020. 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, 2020 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, 2020 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, 2020 as stated in their report which is included elsewhere herein.
ITEM 9B. OTHER INFORMATION
None.
120
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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, 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 26, 2021, 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 26, 2021
121
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 2021 Annual Meeting of its Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A on or about April 9, 2021.
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 2021 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 9, 2021.
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 2021 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 9, 2021.
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 2021 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 9, 2021.
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 2021 Annual Meeting of its Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or about April 9, 2021.
122
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, 2020 and 2019
Consolidated Statements of Changes in Capital – years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Income and Comprehensive Income – years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows – years ended December 31, 2020, 2019 and 2018
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.
123
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 26th day of February 2021.
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
/S/ EDWARD L. RAND, JR.
Edward L. Rand, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
February 26, 2021
/S/ DANA S. HENDRICKS
Dana S. Hendricks
Chief Financial Officer
February 26, 2021
(Principal Financial and Accounting Officer)
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
February 26, 2021
/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
124
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, 2020 and 2019, the related consolidated statements of income, comprehensive income,
changes in capital and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2020, 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, 2020, 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 26, 2021, 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) relate 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.
125
Description of
the Matter
How We
Addressed the
Matter in Our
Audit
Valuation of reserve for losses and loss adjustment expenses
At December 31, 2020, the Company’s gross reserve for losses and loss adjustment expenses was $2.4
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 sensitivity of the significant assumptions
which have a significant impact on the valuation of the reserve for losses and loss adjustment expenses.
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 26, 2021
126
ProAssurance Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
December 31,
2020
December 31,
2019
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost, $2,361,575 and $2,241,304,
respectively; allowance for expected credit losses, $552 as of current period end)
$
Fixed maturities, trading, at fair value (cost, $47,907 and $46,772, respectively)
Equity investments, at fair value (cost, $113,709 and $227,873, respectively)
Short-term investments
Business owned life insurance
Investment in unconsolidated subsidiaries
Other investments (at fair value, $44,116 and $36,018, respectively, otherwise at cost or amortized
cost)
Total Investments
Cash and cash equivalents
Premiums receivable, net
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
$
$
2,457,531 $
48,456
120,101
337,813
67,847
310,529
47,068
3,389,345
215,782
201,395
14,370
385,087
35,885
47,196
57,105
30,529
19,013
65,720
49,610
143,766
4,654,803 $
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
2,417,179 $
361,547
39,998
2,818,725
20,116
182,039
284,713
3,305,593
2,346,526
413,086
52,946
2,812,558
22,051
173,256
285,821
3,293,686
Shareholders' Equity
Common shares (par value $0.01 per share, 100,000,000 shares authorized, 63,217,708 and 63,117,235
shares issued, respectively)
Additional paid-in capital
Accumulated other comprehensive income (loss) (net of deferred tax expense (benefit) of $19,386 and
$9,795, respectively)
Retained earnings
Treasury shares, at cost (9,325,180 shares as of each respective period end)
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
See accompanying notes.
632
388,150
631
384,551
75,227
1,301,163
(415,962)
1,349,210
4,654,803 $
36,955
1,505,738
(415,962)
1,511,913
4,805,599
$
127
ProAssurance Corporation and Subsidiaries
Consolidated Statements of Changes in Capital
(In thousands)
ProAssurance Shareholders' Equity
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
$
628 $ 383,077 $
14,911 $ 1,614,186 $ (418,007) $ 1,594,795
—
—
—
—
2
—
—
—
—
—
—
8,334
3,416
(3,416)
314
5,258
(3,936)
—
—
—
—
—
—
—
—
—
—
(94,314)
(35,238)
—
—
47,057
—
—
730
—
—
—
—
—
8,334
—
1,044
5,258
(3,934)
(94,314)
(35,238)
47,057
630
384,713
(16,911)
1,571,847
(417,277)
1,523,002
—
—
—
1
—
—
—
—
(965)
3,512
(2,709)
—
—
—
—
—
—
—
—
53,866
—
(444)
—
(444)
—
—
—
(66,669)
—
1,004
1,315
—
—
—
—
—
350
3,512
(2,708)
(66,669)
53,866
1,004
631
384,551
36,955
1,505,738
(415,962)
1,511,913
—
—
—
1
—
—
—
—
—
(4,076)
—
(4,076)
691
3,845
(937)
—
—
—
—
—
—
—
—
—
—
(24,772)
38,272
—
—
(175,727)
—
—
—
—
—
—
691
3,845
(936)
(24,772)
38,272
(175,727)
Balance at January 1, 2018
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
Balance at December 31, 2019
Cumulative-effect adjustment-
ASU 2016-13 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 (loss)
Balance at December 31, 2020
$
632 $ 388,150 $
75,227 $ 1,301,163 $ (415,962) $ 1,349,210
* See Note 1 of the Notes to Consolidated Financial Statements for discussion of accounting guidance adopted during the year.
See accompanying notes.
128
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):
Impairment losses
Portion of impairment losses recognized in other comprehensive
income (loss) 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
2020
2019
2018
$
792,715 $
847,532 $
818,853
71,998
(11,921)
93,269
(10,061)
91,884
8,948
(1,745)
237
(1,508)
17,186
15,678
6,470
(978)
227
(751)
60,625
59,874
9,220
874,940
999,834
(490)
—
(490)
(42,998)
(43,488)
9,833
886,030
Net losses and loss adjustment expenses
661,447
753,915
593,210
Underwriting, policy acquisition and operating expenses:
Operating expense
DPAC amortization
SPC U.S. federal income tax expense
SPC dividend expense (income)
Interest expense
Goodwill impairment
Total expenses
Income (loss) before income taxes
Provision for income taxes:
Current expense (benefit)
Deferred expense (benefit)
Total income tax expense (benefit)
Net income (loss)
Other comprehensive income (loss), after tax, net of reclassification
adjustments
Comprehensive income (loss)
Earnings (loss) per share
Basic
Diluted
127,316
110,565
1,746
14,304
15,503
161,115
137,119
115,330
1,059
4,579
16,636
—
1,091,996
1,028,638
(217,056)
(28,804)
(20,181)
(21,148)
(41,329)
(175,727)
(1,165)
(28,643)
(29,808)
1,004
133,689
104,501
366
9,122
16,117
—
857,005
29,025
(6,208)
(11,824)
(18,032)
47,057
38,272
53,866
(35,238)
$
(137,455) $
54,870 $
11,819
$
$
(3.26) $
(3.26) $
0.02 $
0.02 $
0.88
0.88
Weighted average number of common shares outstanding:
Basic
Diluted
53,863
53,906
53,740
53,841
Cash dividends declared per common share
$
0.46 $
1.24 $
53,598
53,749
1.74
See accompanying notes.
129
ProAssurance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Operating Activities
Net income (loss)
Adjustments to reconcile income (loss) to net cash provided by operating activities:
$ (175,727) $
1,004 $
47,057
Year Ended December 31
2020
2019
2018
Goodwill impairment
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
Unearned premiums
Other liabilities
Net cash provided (used) by operating activities
Investing Activities
Purchases of:
Fixed maturities, available-for-sale
Equity investments
Other investments
161,115
21,375
(1,735)
—
18,665
(2,016)
(15,678)
(59,874)
3,840
3,527
—
21,255
(1,983)
43,488
5,321
(21,148)
(28,643)
(11,824)
8,371
11,921
36,672
2,409
42,985
(2,047)
(13,721)
(51,539)
14,597
92,343
(1,451)
10,061
25,849
2,175
(3,855)
(8,948)
31,219
1,168
11,926
(23,381)
(52,902)
(13,481)
(2,125)
8,772
4,697
(4,206)
71,466
16,327
(10,536)
148,166
177,265
(917,037)
(695,552)
(780,698)
(69,406)
(116,092)
(203,157)
(35,616)
(28,851)
(32,153)
Reserve for losses and loss adjustment expenses
70,653
226,679
Funding of qualified affordable housing project tax credit partnerships
(1,583)
(357)
—
Investment in unconsolidated subsidiaries
Proceeds from sales or maturities of:
Fixed maturities, available-for-sale
Equity investments
Other investments
Net sales or (purchases) of fixed maturities, trading
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 the following page.
130
(40,093)
(69,411)
(78,141)
801,580
196,762
35,524
(383)
40,068
2,361
(11,173)
(7,478)
—
(2,010)
(8,484)
568,572
359,727
29,017
(8,254)
42,478
914,021
210,481
29,815
(38,544)
84,534
(30,718)
123,886
(6,455)
(9,586)
16,009
(5)
50,522
(4,022)
(9,636)
(184)
(1,305)
214,897
Continued from the previous page.
Financing Activities
Repayments under Revolving Credit Agreement
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
2020
2019
2018
—
—
(123,000)
(1,502)
(1,447)
(1,396)
(38,664)
(93,204)
(316,476)
(2,345)
(935)
(43,446)
40,413
175,369
(5,024)
(4,115)
(1,005)
(4,309)
(103,790)
94,898
(446,186)
(54,024)
80,471
134,495
$ 215,782 $ 175,369 $
80,471
$
$
$
$
(8,832) $
2,748 $
5,726
14,712 $
14,294 $
16,165
1,351 $
5,436 $
—
2,694 $
16,676 $
43,446
131
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 and workers' compensation insurance entities including an
entity that provides capital to Syndicate 1729 and 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 16.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ProAssurance Corporation and its wholly
owned subsidiaries. Investments in entities where ProAssurance holds a greater than minor interest but does not hold a
controlling interest are accounted for using the equity method. All significant intercompany accounts and transactions are
eliminated in consolidation. ProAssurance subsidiaries located in the U.K. are normally reported on a quarter 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.
Reclassifications
In ProAssurance's December 31, 2019 and 2018 reports on Form 10-K, underwriting, policy acquisition and operating
expenses for 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 reported in the Company's Segregated Portfolio Cell Reinsurance segment
that elected to be taxed as U.S. taxpayers. Beginning in 2020, this tax provision is now presented as a separate line item on the
Consolidated Statements of Income and Comprehensive Income as SPC U.S. federal income tax expense. To conform to the
current year presentation, ProAssurance has recast underwriting, policy acquisition and operating expenses for the years ended
December 31, 2019 and 2018 on the Consolidated Statements of Income and Comprehensive Income as well as in the financial
results by segment in Note 16.
Certain other insignificant prior year amounts have been reclassified to conform to the current year presentation.
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.
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. The Company evaluates these estimates and
assumptions on an ongoing basis based on current and historical developments, market conditions, industry trends and other
information that the Company believes to be reasonable under the circumstances. The Company can make no assurance that
actual results will conform to its estimates and assumptions; reported results of operations may be materially affected by
changes in these estimates and assumptions.
As a result of the COVID-19 pandemic, the Company is reevaluating certain of these estimates and assumptions which
could result in material changes to its results of operations including, but not limited to, higher losses and loss adjustment
expenses, lower premium volume, asset impairment charges, declines in investment valuations, reductions in audit premium
estimates, deferred tax valuation allowances and increases in the allowance for expected credit losses related to available-for-
sale securities, premiums receivable and reinsurance receivables. The extent to which the COVID-19 pandemic impacts the
Company's business, results of operations and financial condition will depend on future developments, which are highly
uncertain and cannot be predicted. These factors include, but are not limited to, the duration, spread, severity, reemergence or
mutation of the COVID-19 pandemic, development and wide-scale distribution of medicines or vaccines that effectively treat
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Notes to Consolidated Financial Statements
December 31, 2020
the virus, the effects of the COVID-19 pandemic on the Company's insureds, the loss environment, the healthcare industry, the
labor market and Lloyd's, the actions and stimulus measures taken by governments and governmental agencies, and to what
extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company
may experience an impact to its business as a result of any economic recession that has occurred or may occur in the future.
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 premiums receivable and reinsurance receivables are exposed to credit losses but to-date have not
experienced any significant amount of credit losses. ProAssurance measures expected credit losses on its premiums receivables
and reinsurance receivables on a collective (pool) basis when similar risk characteristics exist, and the Company will reassess
its pools each reporting period to ensure all receivables within the pool continue to share similar risk characteristics. If the
Company determines that a receivable does not share risk characteristics with its other receivables within a pool, it will evaluate
that receivable for expected credit losses on an individual basis. ProAssurance measures expected credit losses associated with
its premium receivables at the segment level as each segment’s premium receivables share similar risk characteristics including
term, type of financial asset and similar historical and expected credit loss patterns. ProAssurance measures expected credit
losses associated with its reinsurance receivables (related to both paid and unpaid losses) at the consolidated level as its
reinsurance receivables share similar risk characteristics including type of financial asset, type of industry and similar historical
and expected credit loss patterns.
ProAssurance measures expected credit losses over the contractual term of each pool utilizing a loss rate method.
Historical internal credit loss experience for each pool is the basis for the Company’s assessment of expected credit losses;
however, the Company may also consider historical credit loss information from external sources. In addition to historical
credit loss data, the Company also considers reasonable and supportable forecasts of future economic conditions in its estimate
of expected credit losses by utilizing industry and macroeconomic factors that it believes most relevant to the collectability of
each pool.
ProAssurance's premiums receivable on its Consolidated Balance Sheet as of December 31, 2020 and 2019 is reported net
of the related allowance for expected credit losses of $6.1 million and $1.6 million, respectively. The following tables present a
roll forward of the allowance for expected credit losses related to the Company's premiums receivable for the year ended
December 31, 2020.
(In thousands)
Premiums
Receivable, Net
Allowance for Expected
Credit Losses
Balance, December 31, 2019
$
249,540 $
Cumulative-effect adjustment on January 1, 2020, before tax -
ASU 2016-13 adoption
Provision for expected credit losses
Write offs charged against the allowance
Recoveries of amounts previously written off
Balance, December 31, 2020
$
201,395 $
1,590
5,160
827
(2,019)
573
6,131
ProAssurance's expected credit losses associated with its reinsurance receivables (related to both paid and unpaid losses)
were nominal in amount as of December 31, 2020. ProAssurance has other financial assets and off-balance-sheet commitments
that are exposed to credit losses; however, expected credit losses associated with these assets and commitments were nominal in
amount as of December 31, 2020.
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
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Notes to Consolidated Financial Statements
December 31, 2020
probable additional amount of EBUB 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, 2020 and 2019, ProAssurance carried EBUB of $3.0 million
and $4.3 million, respectively, as a part of premiums receivable. As a result of the economic impact of COVID-19, the
Company expects future reductions in payroll exposure related to in-force policies that could result in a significant decrease in
audit premium and our EBUB estimate. ProAssurance will continue to monitor and adjust the estimate, if necessary, based on
changes in insured payrolls and economic conditions, as experience develops or new information becomes known; however, the
length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted.
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,
historical paid and incurred loss development trends, and management's evaluation of the current loss environment including
frequency, severity, the expected effect of inflation, general economic and social trends, and the legal and political
environment. Management also takes into consideration 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 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 2020, 2019 and 2018.
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
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Notes to Consolidated Financial Statements
December 31, 2020
reinsurers, an adjustment to these estimates could have a material effect on ProAssurance's results of operations for the period
in which the adjustment is made.
Reinsurance contracts do not relieve ProAssurance from its obligations to policyholders. ProAssurance continually
monitors its reinsurers to minimize its exposure to significant credit losses from reinsurer insolvencies (see previous discussion
under the heading "Credit Losses"). Any amount determined to be uncollectible is written off in the period in which the
uncollectible amount is identified. See Note 4 for further information.
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, certain asset-backed securities and investments in LPs/LLCs. Management values the
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
corporate debt not actively traded and the other asset-backed securities either using dealer quotes for similar securities or
discounted cash flow models using yields currently available for similar securities. Management values certain investment
funds, primarily LPs/LLCs, based on the NAV of the interest held, as provided by the fund.
Nonrecurring Fair Value Measurements
Management measures the fair value of certain assets on a nonrecurring basis 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, fixed assets, goodwill and other intangible assets. These assets would also include
any equity method investments that do not provide a NAV.
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
impairment 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.
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Notes to Consolidated Financial Statements
December 31, 2020
Business Owned Life Insurance
ProAssurance owns life insurance contracts on certain management employees. The life insurance contracts are carried at
their current cash surrender value. Changes in the cash surrender value are included in income in the current period as
investment income. Death proceeds from the contracts are recorded when the proceeds become payable under the policy terms.
Realized Gains and Losses
Realized investment gains and losses are recognized on the first-in, first-out basis for GAAP purposes and on the specific
identification basis for tax purposes.
Impairments
ProAssurance evaluates its available-for-sale investment securities, which at December 31, 2020 and 2019 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 a credit loss. The Company considers a credit loss 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 is expected to be recovered requires the Company 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 the Company’s estimates of those credit
losses. Methodologies used to estimate the present value of expected cash flows are:
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 ProAssurance'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;
• recoveries or additional declines in fair value subsequent to the balance sheet date;
• adverse legal or regulatory events;
• significant deterioration in the market environment that may affect the value of collateral (e.g. decline in real estate
prices);
• significant deterioration in economic conditions; and
• disruption in the business model resulting from changes in technology or new entrants to the industry.
If deemed appropriate and necessary, a discounted cash flow analysis is performed to confirm whether a credit loss exists
and, if so, the amount of the credit loss. ProAssurance uses the single best estimate approach for available-for-sale debt
securities and considers all reasonably available data points, including industry analyses, credit ratings, expected defaults and
the remaining payment terms of the debt security. For fixed rate available-for-sale debt securities, cash flows are discounted at
the security's effective interest rate implicit in the security at the date of acquisition. If the available-for-sale debt security’s
contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, for example, the
prime rate, the LIBOR, or the U.S. Treasury bill weekly average, that security’s effective interest rate is calculated based on the
factor as it changes over the life of the security.
If ProAssurance intends to sell a debt security or believes it will more likely than not be required to sell a debt security
before the amortized cost basis is recovered, any existing allowance will be written off against the security's amortized cost
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Notes to Consolidated Financial Statements
December 31, 2020
basis, with any remaining difference between the debt security's amortized cost basis and fair value recognized as an
impairment loss in earnings.
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, impairment for debt securities is separated into a credit
component and a non-credit component. The credit component of an impairment 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. An allowance for expected
credit losses will be recorded for the expected credit losses through income and the non-credit component is recognized in OCI.
The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the available-for-sale
debt security.
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, 2020, 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, 2020 or 2019.
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 and advanced premiums, DPAC, compensation related items,
tax credit carryforwards, unrealized investment gains (losses) and basis differentials in fixed assets, intangible assets and
operating leases and investments. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in
effect when such benefits are realized. ProAssurance reviews its deferred tax assets quarterly for impairment. If management
determines that it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation allowance is
recorded to reduce the carrying value of the asset. In assessing the need for a valuation allowance, management is required to
make certain judgments and assumptions about the future operations of ProAssurance based on historical experience and
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Notes to Consolidated Financial Statements
December 31, 2020
information as of the measurement period regarding reversal of existing temporary differences, carryback capacity, future
taxable income of the appropriate character, 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 and against a portion of the deferred tax asset related to the U.S. state NOL
carryforwards. Management concluded that it was more likely than not that these deferred tax assets 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 5.
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. Operating leases are
included in operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheet. The ROU asset
represents the right to use the underlying asset for the lease term. As of December 31, 2020, 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, 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, 2020 and 2019. 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 on January 1, 2019, 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.
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Notes to Consolidated Financial Statements
December 31, 2020
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 $26.5 million and $25.7 million at December 31, 2020 and 2019,
respectively. Real estate depreciation expense was $0.9 million, $1.0 million and $1.2 million for the years ended December 31,
2020, 2019 and 2018, respectively.
Goodwill/Intangibles
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. Indefinite lived 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 intangible asset may
be impaired. Amortizable intangible assets and other long-lived assets are tested for impairment at the asset group level upon
the occurrence of certain triggering events or substantive changes in circumstances that indicate the carrying amount of the
asset group may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected
to result from the use of the asset group are less than the carrying amounts of the related asset group. Impairment losses are
measured as the amount by which the carrying amount of the asset groups exceed their fair values. The Company's asset groups
generally correspond to the same level at which goodwill is tested for impairment. The following table provides additional
information regarding ProAssurance's intangible assets.
Gross Carrying Value
December 31
Accumulated
Amortization
December 31
Amortization Expense
Year Ended December 31
(In millions)
2020
2019
2020
2019
2020
2019
2018
Intangible Assets
Non-amortizable
$ 25.8 $ 25.8
Amortizable
98.8
97.7 $ 58.9 $ 52.7 $
6.2 $
6.1 $
6.2
Total Intangible Assets
$ 124.6 $ 123.5
Aggregate amortization expense for intangible assets is estimated to be $6.2 million for each of the years ended December
31, 2021, 2022 and 2023, $5.9 million for the year ended December 31, 2024 and $5.6 million for the year ended December 31,
2025.
Goodwill
Goodwill is tested for impairment annually or more frequently if circumstances indicate an impairment may have
occurred. The date of the Company's annual goodwill impairment testing is October 1.
Impairment of goodwill is tested at the reporting unit level, which is consistent with the Company's reportable segments
identified in Note 16 of the Notes to Consolidated Financial Statements.
During the third quarter of 2020, the Company recorded a goodwill impairment charge of $161.1 million, and the facts
and circumstances that led to this impairment and how the fair value of each reporting unit was estimated, including the
significant assumptions used and other details are outlined in the following section.
Interim Impairment Assessments
As disclosed in the Company's June 30, 2020 report on Form 10-Q, COVID-19 has caused significant market volatility
impacting its actual and projected results along with a decline in the Company's stock price; and the Company performed a
quantitative assessment on the Specialty P&C and Workers' Compensation Insurance reporting units. As a result of the interim
goodwill impairment assessment in the second quarter of 2020, management concluded that the fair value of each of the
Specialty P&C and Workers' Compensation Insurance reporting units were greater than their carrying value as of the testing
date; therefore, goodwill was not impaired and no further impairment testing was required at that time.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
As the impacts persisted into the third quarter, management performed new quantitative assessments of goodwill on the
Company's Specialty P&C and Workers' Compensation Insurance reporting units using updated marketplace data. The updated
data, which was significantly influenced by the Company's continued depressed stock price relative to both the Company's book
value and the comparable stock prices of its peers, impacted a number of key variables in the Company's analysis including the
determination of a higher discount rate and lower valuation multiples. In addition, new guidance given by the Federal Reserve
during the period regarding the expectation of a prolonged low interest rate environment impacted the Company's analysis. This
analysis during the third quarter of 2020 indicated an impairment of the goodwill associated with the Company's Specialty P&C
reporting unit and accordingly the Company recorded a $161.1 million charge to goodwill during the third quarter of 2020.
For each of the interim impairment assessments performed in the second and third quarters of 2020, management
estimated the fair value of the reporting units using both an income approach and a market approach using marketplace data that
was current at the time of each respective analysis. The estimate of fair value derived from the income approach was 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 was based on
price to book multiple data. The determination of fair value involved the use of significant estimates and assumptions, including
revenue growth rates, operating margins, capital requirements, tax rates, terminal growth rates, discount rates, comparable
public companies and synergistic benefits available to market participants. In addition, management made certain judgments
and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each
reporting unit.
Management also performed impairment tests of certain of the Company's definite and indefinite lived intangible assets
for which a triggering event was deemed to have occurred, as discussed above. Based upon these impairment tests, no
impairment of ProAssurance's definite or indefinite lived intangible assets was identified at September 30, 2020.
Annual Impairment Assessment
Subsequent to performing the aforementioned interim impairment assessments, the Company performed its annual
goodwill impairment assessment as of October 1, 2020.
When testing goodwill for impairment on the Company's annual test date, it 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 the Company elects to perform a qualitative
assessment and determine that an impairment is more likely than not, the Company is then required to perform a quantitative
impairment test; otherwise, no further analysis is required. The Company also may elect not to perform the qualitative
assessment and, instead, proceed directly to the quantitative impairment test.
Performance of the qualitative goodwill impairment assessment requires judgment in identifying and considering the
significance of relevant key factors, events, and circumstances that affect the fair values of the Company's reporting units. This
requires consideration and assessment of external factors such as macroeconomic, industry, and market conditions, as well as
entity-specific factors, such as the Company's actual and planned financial performance. The Company also gives consideration
to the difference between each reporting unit's fair value and carrying value as of the most recent date that a fair value
measurement was performed. If the results of the qualitative assessment conclude that it is not more likely than not that the fair
value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed.
The quantitative goodwill impairment test involves comparing the fair value of a reporting unit with its carrying value
including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not
to be impaired. However, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded in an
amount equal to that excess. Any impairment charge recognized is limited to the amount of the respective reporting unit's
allocated goodwill.
Determining the fair value of a reporting unit under the quantitative goodwill impairment test requires judgment and often
involves the use of significant estimates and assumptions, including an assessment of external factors such as macroeconomic,
industry, and market conditions, as well as entity-specific factors, such as actual and planned financial performance. These
estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the
magnitude of any such charge. To assist management in the process of determining any potential goodwill impairment, the
Company may review and consider appraisals from accredited independent valuation firms. Estimates of fair value are
primarily determined using discounted cash flows and market comparisons. These approaches involve significant estimates and
assumptions, including projected future cash flows (including timing), discount rates reflecting the risks inherent in those future
cash flows, perpetual growth rates, and selection of appropriate market comparable metrics and transactions.
As of the most recent goodwill impairment test performed on October 1, 2020, the Company elected to perform a
qualitative goodwill impairment test for its Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
reporting units. 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, the Company's 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 the Company's two reporting units that
have net 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 during the years ended December 31, 2019 or 2018.
Given the evolving, uncertain nature of the COVID-19 pandemic, the estimates and assumptions used by management in
these impairment tests have inherent uncertainties, and different assumptions could lead to materially different results including
impairment charges in the future. Management expects to continue to monitor developments and perform updated analyses as
necessary. See Note 6 of the Notes to Consolidated Financial Statements for additional information about the Company's
goodwill.
Other Liabilities
Other liabilities at December 31, 2020 and 2019 consisted of the following:
(In thousands)
SPC dividends payable
Unpaid shareholder dividends
All other
Total other liabilities
2020
2019
$ 68,865 $ 55,763
2,694
16,676
110,480
100,817
$ 182,039 $ 173,256
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, 2019 included a special dividend declared in the fourth quarter of 2018 that was paid in
January 2020.
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, 2020 for recognition or disclosure in its
Consolidated Financial Statements.
Accounting Changes 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. Included in the scope of this guidance are the
Company's available-for-sale fixed maturity securities and its financial assets held at amortized cost. Under the new guidance,
credit losses are required to be recorded through an allowance for expected credit losses account and the income statement will
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 are 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. ProAssurance adopted 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.
ProAssurance recorded a cumulative-effect adjustment of $4.1 million, net of related tax impacts, to beginning retained
earnings as of January 1, 2020 to increase its consolidated allowance for expected credit losses related to its premiums
receivable. ProAssurance determined that estimated expected credit losses associated with the Company's other financial assets
held at amortized cost included in the scope of this new guidance was nominal as of January 1, 2020. Adoption of this guidance
had no material effect on ProAssurance's results of operations, financial position or cash flows.
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 or the
reporting unit, with the impairment loss not to exceed the carrying amount of goodwill. This new guidance 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
adopted the guidance beginning January 1, 2020.
Adoption of this guidance did not have a significant impact on the Company's interim quantitative goodwill impairment
tests for the Workers' Compensation Insurance or Specialty P&C reporting units performed during the second quarter of 2020
or on the interim quantitative goodwill impairment tests for the Workers' Compensation Insurance or Segregated Portfolio Cell
Reinsurance reporting units performed during the third quarter of 2020 as the fair value of each of these reporting units
exceeded their carrying amounts (see previous discussion of these interim impairment assessments). Adoption of this guidance
simplified the Company's interim quantitative goodwill impairment test for the Specialty P&C reporting unit during the third
quarter of 2020 as the Company measured the impairment loss on this reporting unit by the amount that the carrying amount of
the reporting unit exceeded its fair value, with the impairment charge not to exceed the carrying amount of goodwill.
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 adopted the additional disclosure requirements beginning January 1, 2020. Adoption of this guidance
had no material effect on ProAssurance’s results of operations, financial position or cash flows as it affected disclosures only.
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 adopted the guidance beginning January 1, 2020, and adoption had no 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
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 adopted the guidance beginning January 1, 2020. ProAssurance does not have any
material indirect interests held through related parties under common control; therefore, adoption had no 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 adopted the guidance beginning January 1, 2020, and adoption had no material effect on ProAssurance’s results
of operations, financial position or cash flows.
Reference Rate Reform (ASU 2020-04)
The FASB issued guidance intended to assist stakeholders during the market-wide reference rate transition period and is
effective for a limited period between March 12, 2020 and December 31, 2022. The guidance provides optional expedients and
exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another
reference rate that is expected to be discontinued because of reference rate reform. ProAssurance has exposure to LIBOR-based
financial instruments through its 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 the liability
exposure. Additionally, ProAssurance has exposure to LIBOR in its available-for-sale fixed maturities portfolio which
represented approximately 6% of total investments, or $191 million as of December 31, 2020; 34% of these investments with
exposure to LIBOR were issued since 2019 and include provisions for an alternative benchmark rate. Optional expedients for
contract modifications include a prospective adjustment that does not require contract remeasurement or reassessment of a
previous accounting determination; therefore, the modified contract is accounted for as a continuation of the existing contract.
ProAssurance adopted the guidance beginning March 12, 2020, and adoption had no 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 elected to early adopt this guidance using a prospective
application during the second quarter of 2020. The most impactful provision of the new guidance on the Company is the
removal of the limitation on the tax benefit recognized on pre-tax losses during interim periods in which the year-to-date loss
exceeds the expected loss for the fiscal year.
Accounting Changes Not Yet Adopted
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.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 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, 2020 and December 31, 2019 are
shown in the following tables. Where applicable, the tables also indicate the fair value hierarchy of the valuation techniques
utilized to determine those fair values. For some assets, the inputs used to measure fair value may fall into different levels of the
fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair
value measurement. Assessments of the significance of a particular input to the fair value measurement require judgment and
consideration of factors specific to the assets being valued.
145
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
(In thousands)
Level 1
Level 2
Level 3
Fair Value
December 31, 2020
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
$
— $ 107,059 $
—
—
—
—
—
—
—
—
—
12,261
332,920
1,326,077
—
274,509
13,310
113,092
266,345
48,456
— $ 107,059
12,261
—
332,920
—
1,326,077
—
3,265
3,265
276,541
2,032
13,310
—
113,092
—
273,006
6,661
48,456
—
13,810
564
1,262
2,240
69,475
20,202
307,695
1,509
—
—
—
—
—
—
—
30,118
42,607
329
$ 416,757 $ 2,567,083 $
—
—
—
—
—
—
—
—
—
11,958
13,810
564
1,262
2,240
69,475
20,202
337,813
44,116
329
2,995,798
12,548
233,711
$ 3,242,057
146
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
December 31, 2019
Fair Value Measurements Using
Total
Level 1
Level 2
Level 3
Fair Value
(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
$
— $ 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
—
—
—
—
—
—
—
22,594
32,713
760
— $ 110,467
17,340
—
296,093
—
1,335,285
—
5,079
5,079
208,408
—
8,221
—
71,868
—
236,024
2,992
47,284
—
—
—
—
—
—
—
—
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
Total assets categorized within the fair value hierarchy
$ 545,607 $ 2,384,065 $
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
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, 2020 and 2019.
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ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Level 2 Valuations
Below is a summary description of the valuation methodologies primarily used by the pricing services for securities in the
Level 2 category, by security type:
U.S. Treasury obligations were valued based on quoted prices for identical assets, or, in markets that are not active, quotes
for similar assets, taking into consideration adjustments for variations in contractual cash flows and yields to maturity.
U.S. Government-sponsored enterprise obligations were valued using pricing models that consider current and historical
market data, normal trading conventions, credit ratings and the particular structure and characteristics of the security being
valued, such as yield to maturity, redemption options, and contractual cash flows. Adjustments to model inputs or model results
were included in the valuation process when necessary to reflect recent regulatory, government or corporate actions or
significant economic, industry or geographic events affecting the security’s fair value.
State and municipal bonds were valued using a series of matrices that considered credit ratings, the structure of the
security, the sector in which the security falls, yields and contractual cash flows. Valuations were further adjusted, when
necessary, to reflect the expected effect on fair value of recent significant economic or geographic events or ratings changes.
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 other asset-backed securities. These securities were valued using the respective
valuation methodologies discussed above for each security type.
Short-term investments were securities maturing within one year, carried at fair value which approximated the cost of the
securities due to their short-term nature.
Other investments consisted primarily of convertible bonds valued using a pricing model that incorporated selected dealer
quotes as well as current market data regarding equity prices and risk free rates. If dealer quotes were unavailable for the
security being valued, quotes for securities with similar terms and credit status were used in the pricing model. Dealer quotes
selected for use were those considered most accurate based on parameters such as underwriter status and historical reliability.
Other assets consisted of an interest rate cap derivative instrument valued using a model which considers the volatilities
from other instruments with similar maturities, strike prices, durations and forward yield curves. 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%.
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, 2020, 100% of the securities were
148
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
rated and the average rating was BB+. At December 31, 2019, 66% of the securities were rated and the average rating was
BBB-.
Residential mortgage-backed and other asset-backed securities consisted of securitizations of receivables valued using
dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities.
Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments
of credit quality were based on NRSRO ratings, if available, or were subjectively determined by management if not available.
At December 31, 2020, 51% of the securities were rated and the average rating was AA-. At December 31, 2019, 100% of the
securities were rated and the average rating was AA.
Other investments consisted of convertible securities for which limited observable inputs were available at December 31,
2019. 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, 2020
December 31, 2019
Valuation Technique
Unobservable
Input
Range
(Weighted Average)
Assets:
Corporate debt, limited
observable inputs
$3,265
$5,079
Residential mortgage-
backed securities
$2,032
$—
Other asset-backed
securities
$6,661
$2,992
Market Comparable
Securities
Discounted Cash Flows
Market Comparable
Securities
Discounted Cash Flows
Market Comparable
Securities
Discounted Cash Flows
Other investments
$—
$3,086
Discounted Cash Flows
Comparability
Adjustment
Comparability
Adjustment
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% - 5% (2.5%)
0% - 5% (2.5%)
0% - 10% (5%)
The significant unobservable inputs used in the fair value measurement of the above listed securities were the valuations
of comparable securities with similar issuers, credit quality and maturity. Changes in the availability of comparable securities
could result in changes in the fair value measurements.
149
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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, 2019
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, 2020
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, 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
$
$
Transfers
December 31, 2020
Level 3 Fair Value Measurements – Assets
Corporate
Debt
Asset-backed
Securities
Other
Investments
$
5,079 $
2,992 $
3,086 $
Total
11,157
(2)
—
216
2,869
(2,178)
945
(3,664)
3,265 $
(18)
(8)
109
20,490
(4,346)
605
(11,131)
—
151
—
—
—
—
(3,237)
8,693 $
— $
(20)
143
325
23,359
(6,524)
1,550
(18,032)
11,958
— $
— $
151 $
151
December 31, 2019
Level 3 Fair Value Measurements – Assets
Corporate
Debt
Asset-backed
Securities
Other
Investments
Total
$
4,322 $
3,850 $
3 $
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 $
(202)
151
239
6,666
(4,368)
5,729
(5,233)
11,157
— $
— $
164 $
164
Transfers shown in the preceding Level 3 tables were as of the end of the period in which the transfer occurred. All
transfers were to or from Level 2.
All transfers in and out of Level 3 during 2020 and 2019 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.
150
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Fair Values Not Categorized
At December 31, 2020 and 2019, 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, 2020 and fair values of these
investments as of December 31, 2020 and 2019 were as follows:
(In thousands)
December 31, 2020
December 31, 2020
December 31, 2019
Unfunded
Commitments
Fair Value
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)
None
$
12,548
$
22,477
$12,395
None
None
$44,252
None
$1,937
None
$38,103
16,387
—
596
138,357
—
34,848
—
43,523
233,711
19,011
5,293
30,542
120,343
1,951
42,415
14,519
36,450
270,524
293,001
Total investments carried at NAV
$
246,259
$
Below is additional information regarding each of the investments listed in the table above as of December 31, 2020.
(1) This investment fund is focused on the structured mortgage market. The fund primarily invests 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 two unrelated LP funds that are structured to provide interest
distributions primarily through diversified portfolios of private debt instruments. One LP allows redemption by
special consent, while the other does not permit redemption. Income and capital are to be periodically distributed at
the discretion of the LPs over an anticipated time frame that spans from three to eight years.
(3) This fund is a LP that holds long equities of public international companies and was fully redeemed during the second
quarter of 2020.
(4) This investment holds primarily long and short North American equities and targets absolute returns using strategies
designed to take advantage of market opportunities. Redemptions are permitted; however, 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.
(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. This fund was fully redeemed during the fourth quarter of
2020.
151
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
(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. This fund was fully redeemed during the second quarter of 2020.
(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
During the third quarter of 2020, ProAssurance recognized a nonrecurring fair value measurement related to the goodwill
in its Specialty P&C reporting unit with a carrying value of $161.1 million prior to the fair value measurement. This
nonrecurring fair value measurement resulted in the goodwill being written down to its implied fair value of zero resulting in an
impairment of the goodwill of $161.1 million. The inputs used in the fair value measurement were non-observable and, as such,
were categorized as a Level 3 valuation. ProAssurance did not have any other assets or liabilities that were measured at fair
value on a nonrecurring basis at December 31, 2020 or 2019.
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, 2020
December 31, 2019
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
$
$
$
$
$
67,847 $
2,952 $
31,128 $
67,847 $
2,952 $
31,141 $
66,112 $
2,931 $
28,645 $
66,112
2,931
28,650
250,000 $
36,113 $
30,334 $
269,160 $
36,113 $
30,334 $
250,000 $
37,617 $
27,953 $
273,865
37,617
27,953
* 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.
152
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 $30.6 million and $26.9 million at December 31,
2020 and 2019, respectively. The deferred compensation liabilities are adjusted to match the fair value of the deferred
compensation assets. Other assets also included an unsecured note receivable under a separate line of credit agreement. The fair
value of the note receivable was based on the present value of expected cash flows from the note receivable, discounted at
market rates on the valuation date for receivables with similar credit standings and similar payment structures.
The fair value of the debt was estimated based on the present value of expected future cash outflows, discounted at rates
available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance.
153
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
3. Investments
Available-for-sale fixed maturities at December 31, 2020 and December 31, 2019 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
December 31, 2020
Allowance
for
Expected
Credit
Losses
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
$ 104,097 $
12,103
316,022
1,267,992
269,752
12,623
109,244
269,742
— $
—
—
552
—
—
—
—
2,985 $
158
16,937
63,204
7,171
687
4,788
4,006
23 $ 107,059
12,261
—
332,920
39
1,329,342
1,302
276,541
382
13,310
—
113,092
940
273,006
742
$ 2,361,575 $
552 $ 99,936 $
3,428 $ 2,457,531
December 31, 2019
Amortized
Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated Fair
Value
$
109,060 $
1,533 $
126 $
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
1,308,889
205,588
8,054
70,621
234,219
125
9,110
33,050
3,139
182
1,468
1,958
—
675
17,340
296,093
1,575
1,340,364
319
15
221
153
208,408
8,221
71,868
236,024
$ 2,241,304 $
50,565 $
3,084 $ 2,288,785
154
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The recorded cost basis and estimated fair value of available-for-sale fixed maturities at December 31, 2020, 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
Due after
one year
through
five years
Due after
five years
through
ten years
Due after
ten years
Total Fair
Value
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
$ 104,097 $
23,049 $
73,580 $
10,430 $
— $ 107,059
12,103
316,022
—
14,466
1,267,992
143,719
9,093
141,826
700,708
3,014
158,927
425,711
154
12,261
17,701
332,920
59,204
1,329,342
269,752
12,623
109,244
269,742
$ 2,361,575
276,541
13,310
113,092
273,006
$ 2,457,531
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, 2020.
Cash and securities with a carrying value of $42.3 million at December 31, 2020 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, 2020, ProAssurance's FAL investments were comprised
of available-for-sale fixed maturities with a fair value of $95.0 million and cash and cash equivalents of $11.2 million on
deposit with Lloyd's in order to satisfy these FAL requirements. During the third quarter of 2020, ProAssurance received a
return of approximately $32.3 million of cash and cash equivalents from its FAL balances given the Company's reduced
participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%.
155
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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, 2020 and December 31, 2019, 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, 2020
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
$
14,390 $
23 $
14,390 $
23 $
— $
State and municipal bonds
Corporate debt
Residential mortgage-backed
securities
Other commercial mortgage-
backed securities
Other asset-backed securities
6,416
94,695
34,928
18,766
43,739
39
1,302
382
940
742
6,416
79,436
34,509
18,480
37,850
39
1,020
—
15,259
381
935
701
419
286
5,889
$ 212,934 $
3,428 $ 191,081 $
3,099 $
21,853 $
—
—
282
1
5
41
329
(In thousands)
Fixed maturities, available-for-sale
Total
December 31, 2019
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 $
103 $
10,654 $
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
35,621
88,582
59,291
319
28,048
459
18,339
48,912
$ 317,779 $
15
221
153
158
16,924
37,322
3,084 $ 221,960 $
674
932
63
—
944
39,672
31,243
301
206
1,415
145
2,123 $
11,590
95,819 $
23
1
643
256
15
15
8
961
As of December 31, 2020, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were
292 debt securities (11.1% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing
229 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.4 million
and $0.2 million, respectively. The securities were evaluated for impairment as of December 31, 2020.
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 impairment as of 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 impairment due to credit or non-credit factors. 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, 2020, 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
156
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
the December 31, 2020 impairment 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.
The following tables present a roll forward of the allowance for expected credit losses on available-for-sale fixed
maturities for the year ended December 31, 2020.
Balance December 31, 2019
(In thousands)
Additional credit losses related to securities for which:
No allowance for credit losses has been previously
recognized
Reductions related to:
Securities sold during the period
Balance December 31, 2020
$
$
Year Ended December 31, 2020
Corporate Debt
Total
— $
—
1,508
1,508
(956)
552 $
(956)
552
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
2020
2019
2018
$
$
354.4 $
917.0 $
177.1 $
695.6 $
599.6
780.7
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 Sheets as of December 31, 2020 and 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)
2020
2019
2018
Year Ended December 31
Fixed maturities
Equities
Short-term investments, including Other
BOLI
Investment fees and expenses
$
69,308 $
4,369
2,683
2,023
(6,385)
Net investment income
$
71,998 $
72,593 $
17,650
7,493
2,017
(6,484)
93,269 $
69,515
21,418
5,649
1,983
(6,681)
91,884
157
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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, 2020
Carrying Value
Percentage
Ownership
December 31,
2020
December 31,
2019
See below
See below
$
27,719 $
46,421
—
2,085
See below
282,810
310,314
$
310,529 $
358,820
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 $9.4 million and $17.2 million at December 31, 2020 and 2019, respectively. ProAssurance's ownership
percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of
$18.3 million and $29.2 million at December 31, 2020 and 2019, respectively. Since ProAssurance has the ability to exert
influence over the partnerships but does not control them, all are accounted for using the equity method. See further discussion
of the entities in which ProAssurance holds passive interests in Note 14.
ProAssurance's other tax credit partnership is an investment in a historic tax credit partnership that generates 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 this investment reflects ProAssurance's total funded commitment less any amortization.
During the second quarter of 2020, this investment was fully amortized up to the total current funded commitment.
ProAssurance's ownership percentage relative to the historic tax credit partnership is almost 100%. Since ProAssurance has the
ability to exert influence over the partnership but does not control it, it is accounted for using the equity method. See further
discussion of the entities in which ProAssurance holds passive interests in Note 14.
ProAssurance holds interests in investment fund LPs/LLCs and other equity method investments and LPs/LLCs which are
not considered to be investment funds. ProAssurance's ownership percentage relative to four 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 $46.2 million at December 31, 2020 and $41.0 million at December 31, 2019. ProAssurance's ownership
percentage relative to the remaining investments and LPs/LLCs is less than 25%; these interests had a carrying value of $236.6
million at December 31, 2020 and $269.3 million at December 31, 2019. ProAssurance does not have the ability to exert control
over any of these funds.
158
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 a historic tax credit partnership. Investment results recorded reflect ProAssurance's allocable portion of
partnership operating results. Tax credits reduce income tax expense in the period they are recognized. The results recorded and
tax credits recognized related to ProAssurance's tax credit partnership investments were as follows:
(In thousands)
Qualified affordable housing project tax credit
partnerships
Losses recorded
Tax credits recognized
Historic tax credit partnership
Losses recorded
Tax credits recognized
Year Ended December 31
2020
2019
2018
$ 18,684 $ 19,231 $ 18,889
$ 17,465 $ 21,933 $ 18,474
$
$
1,092 $
1,672 $
412 $
— $
5,434
2,567
Due to the expected NOL for the year ended December 31, 2020 and realized NOL for the year ended December 31,
2019, the tax credits generated from tax credit partnership investments of $17.9 million and $18.2 million, respectively, were
deferred and are expected to be utilized in future periods (see further discussion in Note 5).
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 impairment losses:
Corporate debt
Portion of impairment 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), 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
2020
2019
2018
$
(1,745) $
(978) $
(490)
237
(1,508)
13,855
(2,501)
288
13,192
3,883
501
227
(751)
3,786
(538)
74
20,577
1,626
705
—
(490)
5,942
(5,799)
(100)
12,230
1,340
(317)
(16,287)
30,674
(52,707)
3,850
405
3,653
68
(3,849)
262
$ 15,678 $ 59,874 $ (43,488)
For the year ended December 31, 2020, ProAssurance recognized $1.5 million of credit-related impairment losses in
earnings and a nominal amount of non-credit impairment losses in OCI. The credit-related impairment losses recognized in
2020 primarily related to corporate bonds in the energy and consumer sectors. Additionally, 2020 included credit-related
impairment losses related to four corporate bonds in various sectors, which were sold during 2020. The non-credit impairment
losses recognized during 2020 related to three corporate bonds in the energy and consumer sectors. For the year ended
December 31, 2019, ProAssurance recognized credit-related impairment losses in earnings of $0.8 million and nominal amount
of non-credit impairment losses in OCI, both of which related to three corporate bonds in the energy and consumer sectors. For
159
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
the year ended December 31, 2018, ProAssurance recognized credit-related impairment losses in earnings of $0.5 million
related to debt instruments from two issuers in the energy sector.
ProAssurance recognized $15.7 million of net realized investment gains during 2020, driven primarily by realized gains
on the sale of available-for-sale fixed maturities and equity investments, partially offset by unrealized holding losses resulting
from decreases in the fair value on the Company's equity portfolio due to the volatility in the global financial markets related to
COVID-19. ProAssurance recognized $59.9 million of net realized investment gains during 2019 driven by both realized gains
from the sale of equity investments and unrealized holding gains on the Company's equity portfolio due to the improvement in
the market since December 31, 2018, which caused the Company's equity securities to increase in value. The most significant
sectors that benefited from the improvement in the market were the financial and energy sectors. ProAssurance recognized
$43.5 million of net realized investment losses during 2018 driven by unrealized holding losses on the Company's equity
portfolio due to market volatility throughout 2018, which caused the securities to decline in value; the most significant sectors
impacted were the financial and energy sectors, although all sectors were impacted.
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 impairment was recorded in OCI.
(In thousands)
Balance beginning of period
Additional credit losses recognized during the period, related to
securities for which:
Year Ended December 31
2020
2019
2018
$
470 $
93 $
1,313
No impairment has been previously recognized
Impairment has been previously recognized
Reductions due to:
Securities sold during the period (realized)
Balance December 31
1,064
258
377
—
—
—
(1,240)
—
(1,220)
$
552 $
470 $
93
4. Reinsurance
ProAssurance purchases reinsurance from third-party reinsurers and insurance enterprises in order to reduce its net
exposure to losses, to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the
higher limit coverages the Company offers and as a mechanism for providing custom insurance solutions. ProAssurance also
uses reinsurance arrangements as a mechanism for sharing risk with insureds or their affiliates.
The effects of reinsurance for the years ended December 31, 2020, 2019 and 2018 were as follows:
(In thousands)
2020
2019
2018
Year Ended December 31
Direct
Assumed
Ceded
$ 814,298
$ 919,799
$ 910,198
40,124
47,691
47,113
(106,721)
(124,765)
(122,397)
Net premiums written
$ 747,701
$ 842,725
$ 834,914
Direct
Assumed
Ceded
$ 862,742
$ 926,035
$ 903,354
43,555
45,668
41,535
(113,582)
(124,171)
(126,036)
Net premiums earned
$ 792,715
$ 847,532
$ 818,853
Losses and loss adjustment expenses
$ 741,719
$ 871,780
$ 675,784
Reinsurance recoveries
(80,272)
(117,865)
(82,574)
Net losses and loss adjustment expenses
$ 661,447
$ 753,915
$ 593,210
160
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 minimum and maximum 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 $0.7 million, $2.8 million and $5.5 million during
the years ended December 31, 2020, 2019 and 2018, respectively.
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, 2020, the net total amounts due from reinsurers was $395.3 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 $51.0 million.
At December 31, 2020 reinsurance recoverables totaling approximately $96.1 million were collateralized by letters of
credit or funds withheld. Expected credit losses associated with the Company's reinsurance receivables (related to both paid and
unpaid losses) were nominal in amount as of December 31, 2020. ProAssurance had no allowance for expected credit losses
related to our reinsurance receivables at December 31, 2019 or 2018. During the years ended December 31, 2020, 2019 or
2018, no reinsurance balances were written off for credit reasons. For further information on our allowance for expected credit
losses related to our receivables from reinsurers see Note 1.
During the fourth quarter of 2020, ProAssurance commuted a quota share reinsurance agreement with one of its reinsurers
which resulted in a net cash receipt of approximately $6.8 million and reduced its receivable from reinsurers on unpaid losses
and LAE by approximately $7.0 million.
During the fourth quarter of 2018 and 2017, ProAssurance commuted the 2017 and 2016 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 and 2016 commutations were reported in both the Specialty P&C and Lloyd's Syndicates segments results
during the first quarter of 2019 and 2018, respectively, which resulted in a net cash receipt of approximately $3.1 million and
$6.1 million, respectively. The commutations reduced the receivable from reinsurers on unpaid losses and LAE, combined, by
approximately $3.8 million and $6.7 million during the years ended December 31, 2019 and 2018, respectively.
161
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
5. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Significant components of ProAssurance’s deferred
tax assets and liabilities were as follows:
(In thousands)
December 31
2020
2019
Deferred tax assets
Unpaid loss discount
Unearned premium adjustment
Compensation related
Basis differentials–investments
Intangibles
Operating lease liabilities
Basis differentials-foreign operations
Tax credit carryforward
Net operating loss carryforward
Other
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
Basis differentials-foreign operations
Intangibles
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
$
36,452 $
14,835
10,935
2,595
522
4,224
—
36,155
9,244
1,700
116,662
(8,581)
108,081
(8,929)
(6,297)
(19,351)
(4,441)
(4,015)
—
(790)
(7,153)
—
(50,976)
57,105 $
$
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
As of December 31, 2020, ProAssurance had U.S. state and U.K. income tax NOL carryforwards of approximately
$52.7 million and $32.9 million, respectively. The U.K. NOL carryforwards do not expire while the state NOL carryforwards
will begin to expire in 2031.
ProAssurance had $36.1 million of available tax credit carryforwards generated from the Company's investments in tax
credit partnerships, of which $18.2 million and $17.9 million may be carried forward until December 31, 2039 and 2040,
respectively. These tax credits have been deferred and carried forward due to the Company's realized NOL in 2019 and
expected NOL in 2020.
In 2020 and 2019, 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 2020 and 2019 of
$6.2 million and $4.9 million, respectively. The increase in the valuation allowance related to the U.K. NOL carryforward in
2020 as compared to 2019 was primarily due to an increase in the U.K. tax rate from 17% to the current tax rate of 19% as well
as current year activity.
162
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
In 2020, management evaluated the realizability of the deferred tax asset related to the U.S. state NOL carryforwards and
concluded that it was more likely than not that a portion of the deferred tax asset will not be realized; therefore, a valuation
allowance was recorded against a portion of the deferred tax asset related to the U.S. state NOL carryforwards in 2020 of
$1.9 million.
Deferred tax assets and liabilities include SPCs the Company participates in at Inova Re, net of a valuation allowance of
$0.5 million and $0.6 million at December 31, 2020 and 2019, respectively. Due to the limited operations of these SPCs as of
December 31, 2020 and 2019, management concluded that a valuation allowance was required against the DTAs of certain
SPCs. The nominal decrease in the valuation allowance related to the SPCs at Inova Re is due to current year activity.
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 $18.9 million at December 31, 2020 and $8.0 million at December 31,
2019, both carried as a part of other assets.
The statute of limitations is now closed for all tax years prior to 2017.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2020, 2019 and 2018, were as
follows:
(In thousands)
2020
2019
2018
Balance at January 1
$
5,070 $
3,601 $
5,341
Increases for tax positions taken during the current year
Decreases for tax positions taken during the current year
Increases for tax positions taken during prior years
Decreases for tax positions taken during prior years
Decreases relating to a lapse of the applicable statute of limitations
—
(4,853)
5,342
—
(360)
1,749
—
—
—
(280)
—
(777)
—
(800)
(163)
Balance at December 31
$
5,199 $
5,070 $
3,601
At December 31, 2020 and 2019, approximately $0.8 million and $1.2 million, respectively, of ProAssurance's uncertain
tax positions, if recognized, would affect the effective tax rate. As with any uncertain tax position, there is a possibility that the
ultimate benefit realized could differ from the estimate management has established. Management believes that it is reasonably
possible that a portion of unrecognized tax benefits at December 31, 2020 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, 2020, 2019 and 2018. The accrued liability for interest was approximately $0.5 million and
$0.6 million at December 31, 2020 and 2019, respectively.
Income tax expense (benefit) for each of the years ended December 31, 2020, 2019 and 2018 consisted of the following:
(In thousands)
2020
2019
2018
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)
$
163
$
(19,885) $
(2,147) $
(6,509)
(296)
(20,181)
982
(1,165)
(20,476)
(27,404)
(672)
(21,148)
(41,329) $
(1,239)
(28,643)
(29,808) $
301
(6,208)
(11,765)
(59)
(11,824)
(18,032)
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
A reconciliation of “expected” income tax expense (benefit) to actual income tax expense (benefit) for each of the years
ended December 31, 2020, 2019 and 2018 were as follows:
(In thousands)
2020
2019
2018
Computed “expected” tax expense (benefit)
Tax-exempt income (1)
Tax credits
Non-U.S. operating results
Tax deficiency (excess tax benefit) on share-based
compensation
Tax rate differential on loss carryback
Goodwill impairment
Provision-to-return differences
Change in uncertain tax positions
State income taxes
Benefit from amended returns
Other
$
(45,582) $
(6,049) $
(976)
(17,876)
(1,307)
457
(7,758)
31,413
1,217
(1,674)
(561)
—
1,318
(1,528)
(21,933)
(1,447)
99
(3,400)
—
3,595
1,956
(376)
(550)
(175)
6,095
(2,505)
(21,059)
2,269
(275)
—
—
(2,309)
(51)
129
—
(326)
Total income tax expense (benefit)
$
(41,329) $
(29,808) $
(18,032)
(1) Includes tax-exempt interest, dividends received deduction and change in cash surrender value of BOLI.
The Company's pre-tax loss in 2020 included a $161.1 million goodwill impairment recognized in relation to the Specialty
P&C reporting unit during the third quarter of 2020. Of the $161.1 million goodwill impairment, $149.6 million was non-
deductible for which no tax benefit was recognized while the remaining $11.5 million was deductible for which a 21% tax
benefit was recognized on the related tax amortization. See further discussion on this goodwill impairment in Notes 1 and 6.
The tax rate differential on loss carryback for the year ended December 31, 2020 represents the additional tax rate differential of
14% on the carryback of the 2020 and 2019 NOLs to the 2015 and 2014 tax years, respectively, as a result of changes made by
the CARES Act to the NOL provisions of the tax law (see further discussion in this section under the heading "Coronavirus
Aid, Relief and Economic Security Act").
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 the
Company cedes to the SPCs at Inova Re, one of its other wholly owned Cayman Islands reinsurance subsidiaries, 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 Cayman Islands SPC operations in Note 16. Management has evaluated its exposure to the BEAT and has
concluded that the Company’s expected outbound deductible payments to related foreign entities are below the threshold for
application of the BEAT; therefore, ProAssurance has not recognized any incremental tax expense for the BEAT provision of
the TCJA during the years ended December 31, 2020 or 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 the inclusion 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 each of the years ended December 31, 2020 and 2019.
164
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Coronavirus Aid, Relief and Economic Security Act
In response to COVID-19, the CARES Act was signed into law on March 27, 2020 and contains several provisions for
corporations and eases certain deduction limitations originally imposed by the TCJA. The CARES Act, among other things,
includes temporary changes regarding the prior and future utilization of NOLs, temporary changes to the prior and future
limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social
Security taxes and the creation of certain refundable employee retention credits. ProAssurance has an NOL of approximately
$45.3 million from the 2020 tax year that will be carried back to the 2015 tax year and is expected to generate a tax refund of
approximately $15.9 million. Additionally, ProAssurance had an NOL of approximately $25.6 million from the 2019 tax year
which was carried back to the 2014 tax year and generated a tax refund of approximately $9.0 million which we received in
February 2021. ProAssurance has evaluated the other provisions of the CARES Act and has concluded that they will not have a
material impact on the Company's financial position or results of operations.
6. 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.
Goodwill is tested for impairment annually or more frequently if circumstances indicate an impairment may have
occurred. The date of the Company's annual goodwill impairment test is October 1. Impairment of goodwill is tested at the
reporting unit level, which is consistent with the Company's reportable segments identified in Note 16. Of the Company's five
reporting units, three have goodwill - Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell
Reinsurance.
As discussed in Note 1, during the third quarter of 2020 the Company recorded a pre-tax impairment charge of $161.1
million to fully impair the goodwill in the Specialty P&C reporting unit. The Company performed its annual goodwill
impairment assessment as of October 1, 2020. Management concluded that it was not more likely than not that the fair value of
each of the Company's two reporting units that have net goodwill was less than the carrying value of each reporting unit as of
the testing date; therefore, no goodwill impairment was recorded during the fourth quarter of 2020.
There were no changes in the carrying amount of goodwill or accumulated impairment losses for the year ended
December 31, 2019. The table below presents the carrying amount of goodwill and accumulated impairment losses by reporting
unit at December 31, 2020:
(In thousands)
Specialty P&C
Reporting Unit
Workers'
Compensation
Insurance
Segregated
Portfolio Cell
Reinsurance
Total
Goodwill, gross as of January 1, 2020
Accumulated impairment losses*
Goodwill, net as of December 31, 2020
$
$
161,115 $
44,110 $
5,500 $
210,725
(161,115)
—
—
(161,115)
— $
44,110 $
5,500 $
49,610
*Accumulated impairment losses represents the pre-tax impairment loss of $161.1 million recognized in relation to the Specialty P&C
reporting unit during the third quarter of 2020. There were no other impairment losses taken prior to 2020.
165
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 $110.6 million, $115.3 million and $104.5 million for the years ended
December 31, 2020, 2019 and 2018, 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 years ended December 31, 2020 and 2018, ProAssurance did not
determine any DPAC to be unrecoverable. 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. The $9.2 million PDR
was fully amortized during 2020.
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. 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 considers the views of the actuaries as well as
other factors, such as premium rates, historical paid and incurred loss development trends and an evaluation of the current loss
environment including frequency, severity, 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. As of December 31, 2020, the Company expects
there will be impacts to these factors as well as to the timing of loss emergence and ultimate loss ratios for certain coverages it
underwrites as a result of COVID-19 and the related economic shutdown; however, the extent to which COVID-19 impacts
these factors is highly uncertain and cannot be predicted. The industry is experiencing new conditions, including the
postponement of court cases, changes in settlement trends and a significant reduction in economic activity and insured exposure
in some classes. ProAssurance's booked reserves as of December 31, 2020 include consideration of these factors, but the
duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in
significant changes to the Company's reserve estimates in future periods.
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
166
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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.
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. 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 Liability 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 and Average Reported Value Method. 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.
167
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Activity in the reserve for losses and loss adjustment expenses is summarized as follows:
(In thousands)
2020
2019
2018
Balance, beginning of year
Less reinsurance recoverables on unpaid losses and loss adjustment
$
2,346,526 $
2,119,847 $
2,048,381
expenses
Net balance, beginning of year
Net losses:
Current year(1)(2)(3)
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
390,708
1,955,818
343,820
1,776,027
335,585
1,712,796
711,846
(50,399)
661,447
(83,204)
(501,969)
(585,173)
765,698
(11,783)
753,915
(115,133)
(458,991)
(574,124)
685,326
(92,116)
593,210
(117,268)
(412,711)
(529,979)
2,032,092
1,955,818
1,776,027
385,087
390,708
343,820
$
2,417,179 $
2,346,526 $
2,119,847
(1) Current year net losses for the year ended December 31, 2019 included incurred losses of $2.1 million related to a loss portfolio
transfer entered into during 2019 in the Specialty P&C segment. 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, also in the Specialty P&C
segment.
(2) Current year net losses for the year ended December 31, 2019 included a PDR of $9.2 million associated with the unearned
premium of a large national healthcare account's claims-made policy in the Specialty P&C segment. Current year net losses for
the year ended December 31, 2020 included the amortization of the aforementioned $9.2 million PDR which offsets the impact of
the losses incurred associated with the premium earned related to the large national healthcare account's claims-made policy. For
additional information regarding the PDR see Note 7.
(3) During 2020, the aforementioned large national healthcare account did not renew on terms offered by the Company and exercised
its contractual option to purchase extended reporting endorsement or "tail" coverage. As a result, ProAssurance recognized total
current year losses of $60.0 million (assumes a full limit loss) within the Specialty P&C segment for the year ended
December 31, 2020.
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 2020 primarily
reflected a lower than anticipated claims severity trend (i.e., the average size of a claim) in the Specialty P&C segment,
primarily related to the 2014 through 2017 accident years. The net favorable development also reflected overall favorable trends
in claim closing patterns in the Segregated Portfolio Cell Reinsurance and Workers' Compensation Insurance segments. The net
favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment primarily related to the 2014
through 2019 accident years and the net favorable loss development recognized in the Workers' Compensation Insurance
segment primarily related to the 2014 through 2017 accident years.
The net favorable loss development recognized for the year ended December 31, 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 favorable loss development recognized in 2018 primarily reflected a
lower than anticipated claims severity trend for accident years 2011 through 2015.
168
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Claims Development
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 in the following disclosures and tables that provide a more meaningful view of the amount, timing and
uncertainty of cash flows arising from the liability. At the same time, these reserve groups present a disaggregated view of the
major elements of the overall loss reserve liability. The reserve groups include HCPL claims-made reserve, HCPL occurrence
reserve, Medical Technology Liability claims-made reserve, Workers’ Compensation Insurance reserve, Segregated Portfolio
Cell Reinsurance - workers' compensation reserve, Syndicate 1729 casualty reserve, Syndicate 1729 property insurance reserve
and Syndicate 1729 property reinsurance reserve. All other loss reserve categories are deemed to be less homogeneous or
relatively small on a standalone basis and are included in other short-duration lines in the claims development reconciliation.
The composition of the reserve groups is based on similar characteristics with respect to the risks being insured and the
reporting and payout pattern of the underlying claims. In most instances the groups follow the coverage categorizations used in
statutory financial reporting for U.S.-domiciled property-casualty insurance companies.
HCPL claims are disaggregated into those claims covered by claims-made policies and those claims covered by
occurrence policies. For claims-made policies, the insured event generally becomes a liability when the event is first reported to
the insurer. For occurrence policies, the insured event becomes a liability when the event takes place, even if unknown at that
time. Claims-made coverage has a short reporting pattern, with virtually all claims known shortly after the end of the policy
period. Occurrence coverage claims can have an extended reporting pattern, with the time from the loss event until the filing of
the claim often measured in years, at which point the claims resolution process begins. Although the resolution process and
time frame is similar once a claim is reported, combining claims from claims-made and occurrence coverage types would result
in distortion due to the difference in reporting lag. Medical Technology Liability reserves are grouped separately due to the
nature of the risk, including the potential for mass torts and multiple claims arising out of the same product or service. The
small amount of Medical Technology Liability occurrence reserves are included in other short-duration lines.
Workers' compensation reserves in the Workers' Compensation Insurance and the Segregated Portfolio Cell Reinsurance
segments 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 participation 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 the Company's participation in
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 2020 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.
169
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 and social 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, the expected effect of inflation, general economic and
social trends, and the legal and political environment. 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 Specialty line of business.
Healthcare Professional Liability Claims-Made
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2020
($ in thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
$ 348,916 $ 344,808 $ 331,884 $ 305,540 $ 289,400 $ 278,258 $ 264,777 $ 254,329 $ 253,163 $ 251,440 $
(1,522)
— $ 341,289 $ 324,418 $ 319,613 $ 306,956 $ 291,075 $ 279,589 $ 271,110 $ 266,629
264,932 $
(180)
—
—
—
—
—
—
—
—
— $ 315,346 $ 304,209 $ 296,550 $ 287,140 $ 272,364 $ 258,251 $ 248,594
249,477 $
(2,266)
—
—
—
—
—
—
—
— $ 290,020 $ 289,397 $ 280,043 $ 267,442 $ 256,968 $ 244,607
237,091 $
(3,596)
—
—
—
—
—
—
— $ 276,492 $ 269,980 $ 271,138 $ 270,814 $ 256,785
256,082 $
(8,109)
—
—
—
—
—
— $ 271,765 $ 274,643 $ 287,551 $ 293,515
287,142 $
(5,250)
—
—
—
—
— $ 283,746 $ 295,883 $ 331,304
325,919 $ (11,542)
—
—
—
— $ 320,772 $ 377,908
376,111 $ (26,964)
—
—
— $ 377,242
374,525 $ 69,993
—
—
326,152 $ 203,515
3,530
3,699
3,770
3,316
3,267
3,475
3,719
4,150
3,574
2,475
$ 2,948,871
* Includes expected development on reported claims
(In thousands)
Accident Year
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Unaudited
$ 14,417 $ 71,208 $ 133,004 $ 177,089 $ 198,112 $ 214,502 $ 224,982 $ 233,103 $ 237,605 $ 242,034
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
— $ 15,382 $ 73,571 $ 145,488 $ 190,997 $ 215,220 $ 231,652 $ 244,512 $ 250,806
—
—
—
—
—
—
—
—
— $ 16,938 $ 69,657 $ 127,496 $ 171,681 $ 197,265 $ 213,879 $ 220,402
—
—
—
—
—
—
—
— $ 16,764 $ 59,485 $ 116,791 $ 154,236 $ 186,239 $ 200,392
—
—
—
—
—
—
— $ 9,172 $ 55,731 $ 111,741 $ 161,896 $ 195,047
—
—
—
—
—
— $ 9,027 $ 51,869 $ 109,756 $ 164,811
—
—
—
—
— $ 16,309 $ 63,171 $ 134,787
—
—
—
— $ 14,051 $ 79,291
—
—
— $ 17,838
—
—
256,802
231,930
210,534
218,066
203,390
173,183
141,609
66,843
14,100
1,758,491
16,866
$ 1,207,246
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
170
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Healthcare Professional Liability Occurrence
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2020
($ in thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
$ 45,882 $ 44,956 $ 41,453 $ 39,917 $ 37,150 $ 35,004 $ 32,343 $ 29,784 $ 27,533 $
27,287 $
(254)
— $ 45,703 $ 46,513 $ 44,848 $ 40,692 $ 34,774 $ 32,691 $ 29,857 $ 25,705
26,533 $
143
—
—
—
—
—
—
—
—
— $ 32,746 $ 36,602 $ 35,624 $ 34,393 $ 30,906 $ 26,919 $ 24,857
24,782 $
74
—
—
—
—
—
—
—
— $ 30,420 $ 29,918 $ 32,143 $ 29,869 $ 25,885 $ 22,243
22,048 $
362
—
—
—
—
—
—
— $ 35,648 $ 35,347 $ 37,346 $ 40,960 $ 36,468
33,262 $ (1,059)
—
—
—
—
—
— $ 29,609 $ 28,790 $ 27,240 $ 25,019
29,426 $ 2,174
—
—
—
—
— $ 24,571 $ 23,760 $ 21,148
21,498 $ 5,199
—
—
—
— $ 38,420 $ 41,555
40,304 $ 11,413
—
—
— $ 35,420
34,093 $ 20,945
—
—
92,958 $ 90,916
344
400
360
347
361
373
415
389
339
130
$ 352,191
* Includes expected development on reported claims
(In thousands)
Accident Year
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Unaudited
$
291 $ 2,803 $ 8,059 $ 16,544 $ 19,197 $ 21,416 $ 23,194 $ 24,539 $ 24,933 $
25,111
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
— $
363 $ 2,430 $ 7,705 $ 12,212 $ 19,275 $ 21,435 $ 23,095 $ 23,600
—
—
—
—
—
—
—
—
— $
369 $ 3,170 $ 7,826 $ 14,753 $ 16,787 $ 18,949 $ 21,241
—
—
—
—
—
—
—
— $
394 $ 2,260 $ 7,460 $ 10,519 $ 14,604 $ 17,024
—
—
—
—
—
—
— $
(350) $
786 $ 4,854 $ 11,626 $ 15,462
—
—
—
—
—
— $
(182) $
(195) $ 2,883 $ 10,576
—
—
—
—
— $ (6,809) $ (5,858) $ (2,765)
—
—
—
— $
65 $ 2,098
—
—
— $
—
439
—
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
24,138
21,954
17,708
22,455
17,918
1,313
8,562
3,167
60
142,386
6,115
$ 215,920
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
5.0%
18.0% 22.5% 17.0% 11.3%
6.9%
Healthcare Professional Liability Occurrence
(2.6%)
6.4%
16.8% 22.2% 16.6% 11.4%
4.0%
6.3%
3.4%
3.2%
2.0%
1.7%
1.8%
0.7%
171
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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, 2020
($ in thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
$ 17,249 $ 20,930 $ 19,166 $ 15,836 $ 13,794 $ 12,487 $ 12,358 $ 8,202 $ 7,944 $
7,725 $
— $ 11,162 $ 9,989 $ 8,906 $ 7,441 $ 5,824 $ 4,797 $ 5,051 $ 3,889
— $ 9,807 $ 9,955 $ 9,536 $ 7,226 $ 4,697 $ 3,566 $ 3,504
— $ 9,989 $ 10,306 $ 9,012 $ 8,984 $ 7,679 $ 6,194
3,868 $
3,305 $
5,888 $
60
51
201
396
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 9,376 $ 8,757 $ 7,193 $ 5,929 $ 5,081
4,664 $ 1,194
—
—
—
—
—
— $ 9,200 $ 8,467 $ 7,413 $ 6,422
6,241 $ 1,374
—
—
—
—
— $ 11,049 $ 10,143 $ 8,306
4,919 $ 2,017
—
—
—
— $ 10,141 $ 8,108
7,506 $ 4,595
—
—
— $ 10,072
8,324 $ 4,830
—
—
11,082 $ 10,497
$
63,522
522
223
218
272
156
182
99
218
354
154
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$
118 $ 2,034 $ 3,846 $ 5,062 $ 7,376 $ 7,240 $ 7,799 $ 7,664 $ 7,665 $
— $
568 $ 1,520 $ 2,805 $ 3,247 $ 3,366 $ 3,676 $ 3,800 $ 3,817
Unaudited
—
—
—
—
—
—
—
—
— $
102 $ 1,029 $ 1,967 $ 2,599 $ 3,092 $ 3,102 $ 3,102
—
—
—
—
—
—
—
— $
388 $ 1,527 $ 2,564 $ 3,046 $ 3,724 $ 3,776
—
—
—
—
—
—
— $
—
—
—
—
—
25 $
— $
—
—
—
—
440 $ 1,625 $ 2,097 $ 2,567
53 $ 1,690 $ 2,365 $ 2,959
— $
56 $ 1,681 $ 2,017
—
—
—
— $
—
—
6 $
— $
—
191
584
—
7,665
3,817
3,102
4,074
2,911
4,295
2,360
1,850
2,552
40
32,666
351
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
31,207
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Unaudited
Medical Technology Liability
3.6%
21.2%
21.0%
11.6%
15.2%
3.0%
3.9%
(0.4%)
—%
—%
172
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
(In thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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, 2020
($ in thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
$ 65,665 $ 65,783 $ 71,521 $ 72,280 $ 72,420 $ 72,495 $ 72,495 $ 72,495 $ 72,445 $
72,445 $
— $ 80,285 $ 76,551 $ 75,848 $ 76,357 $ 75,836 $ 75,576 $ 75,076 $ 75,076
— $ 86,973 $ 85,935 $ 86,928 $ 88,010 $ 87,260 $ 87,260 $ 89,760
75,076 $
89,560 $
21
672
983
—
—
—
—
—
—
—
— $ 93,019 $ 93,529 $ 93,029 $ 93,029 $ 93,029 $ 93,029
91,329 $ 1,594
—
—
—
—
—
—
— $ 100,101 $ 100,454 $ 98,454 $ 97,654 $ 96,354
93,054 $ 2,248
—
—
—
—
—
— $ 101,348 $ 97,348 $ 92,148 $ 84,799
82,799 $ 2,149
—
—
—
—
— $ 99,874 $ 99,874 $ 99,874
97,874 $ 4,581
—
—
—
— $ 118,095 $ 118,095
120,095 $ 2,054
—
—
— $ 119,752
119,752 $ 9,768
—
—
106,145 $ 35,455
$
948,129
15,245
16,204
16,429
16,210
16,550
15,978
16,083
18,009
17,517
13,994
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$ 21,993 $ 50,900 $ 62,307 $ 67,945 $ 70,146 $ 70,934 $ 71,662 $ 71,856 $ 71,927 $
— $ 27,448 $ 56,122 $ 65,908 $ 70,558 $ 72,766 $ 73,662 $ 73,676 $ 73,768
Unaudited
72,013
73,851
87,772
88,487
87,884
76,954
87,129
— $ 30,554 $ 63,825 $ 76,813 $ 82,369 $ 85,689 $ 86,783 $ 87,466
— $ 30,368 $ 65,922 $ 77,631 $ 85,022 $ 87,314 $ 87,998
— $ 32,078 $ 65,070 $ 78,947 $ 83,483 $ 86,528
— $ 28,377 $ 58,192 $ 69,237 $ 74,886
— $ 31,586 $ 70,333 $ 82,289
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 41,619 $ 86,063
104,216
—
—
— $ 40,994
—
—
88,008
33,431
799,745
3,425
$
151,809
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
(In thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Unaudited
Workers' Compensation Insurance
33.6 % 37.9 % 14.0 %
6.4 %
3.0 %
1.1 %
0.6 %
0.2 %
0.1 %
0.1 %
173
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
(In thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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, 2020
($ in thousands)
Accident Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR*
$ 18,790 $ 19,360 $ 19,629 $ 19,282 $ 18,644 $ 18,725 $ 18,666 $ 18,606 $ 18,522 $
18,212 $
— $ 22,940 $ 21,513 $ 21,048 $ 20,028 $ 19,972 $ 19,864 $ 19,799 $ 19,727
— $ 23,809 $ 25,310 $ 26,758 $ 26,619 $ 26,260 $ 26,033 $ 25,938
— $ 28,248 $ 28,423 $ 29,000 $ 28,373 $ 28,281 $ 27,919
— $ 36,423 $ 32,519 $ 28,746 $ 27,548 $ 26,720
— $ 37,601 $ 34,055 $ 30,998 $ 29,424
— $ 42,725 $ 38,594 $ 34,246
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 43,654 $ 41,283
40,017 $ 2,979
—
—
— $ 48,505
42,345 $ 6,461
—
—
40,094 $ 16,479
$
300,735
19,602 $
25,546 $
27,482 $
26,121 $
28,437 $
32,879 $
27
152
104
188
372
515
775
3,154
3,454
3,723
4,433
4,949
5,327
5,706
6,373
6,081
5,587
* Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Year Ended December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
$ 5,940 $ 14,045 $ 17,197 $ 17,869 $ 18,054 $ 18,177 $ 18,176 $ 18,185 $ 18,185 $
— $ 7,808 $ 14,740 $ 17,728 $ 18,474 $ 19,208 $ 19,402 $ 19,328 $ 19,311
Unaudited
—
—
—
—
—
—
—
—
— $ 8,131 $ 19,054 $ 24,268 $ 25,209 $ 25,366 $ 25,489 $ 25,440
—
—
—
—
—
—
—
— $ 9,933 $ 21,880 $ 26,173 $ 26,810 $ 26,959 $ 27,083
—
—
—
—
—
—
— $ 11,257 $ 21,706 $ 23,977 $ 24,781 $ 25,033
—
—
—
—
—
— $ 10,980 $ 23,003 $ 26,285 $ 27,162
—
—
—
—
— $ 12,404 $ 24,791 $ 28,853
—
—
—
— $ 12,517 $ 27,501
—
—
— $ 15,100
—
—
18,185
19,340
25,442
27,110
25,125
27,211
31,140
33,236
29,604
11,238
247,631
600
All outstanding liabilities before 2011, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
53,704
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
Unaudited
7
8
9
10
Segregated Portfolio Cell Reinsurance - workers'
compensation
35.5 % 39.8 % 14.4 %
3.8 %
1.2 %
0.6 % (0.1%)
—%
0.1 %
—%
174
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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.
Syndicate 1729 Casualty
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2020
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
2019
2020
Total
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims(2)
IBNR(1)
$
6,110 $
5,812 $
5,610 $
5,547 $
5,472 $
5,432 $
5,435 $
— $
14,810 $
14,510 $
14,398 $
14,232 $
14,181
14,031 $
—
—
—
—
—
— $
19,535 $
19,669 $
19,552 $
19,344
18,358 $
—
—
—
—
— $
22,069 $
21,824 $
21,207
23,130 $
—
—
—
— $
18,688 $
18,120
16,569 $
—
—
— $
15,990
16,699 $
—
—
15,258 $
333
1,156
2,511
4,502
7,181
11,190
12,714
nm
nm
nm
nm
nm
nm
nm
$ 109,480
(1) Includes expected development on reported claims
(2) The abbreviation "nm" indicates that the information is not meaningful
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
(In thousands)
Accident Year
2014
2015
2016
2017
2018
2019
2020
Total
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
$
20 $
— $
474 $
724 $
Unaudited
4,092 $
4,214 $
4,320 $
4,580 $
4,852
6,307 $
10,313 $
10,947 $
11,654
—
—
—
—
—
— $
2,495 $
8,441 $
12,869 $
13,596
—
—
—
—
— $
2,611 $
8,301 $
12,871
—
—
—
— $
1,852 $
—
—
— $
—
4,905
1,124
—
12,104
14,436
14,990
6,710
2,831
1,982
57,905
—
$
51,575
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
175
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Syndicate 1729 Property Insurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2020
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims
IBNR(1)
$
890 $
1,089 $
888 $
864 $
866 $
831 $
882 $
— $
5,519 $
5,917 $
6,194 $
6,159 $
5,886
5,215 $
— $
11,896 $
12,984 $
12,823 $
12,475
12,835 $
— $
15,018 $
17,634 $
19,976
19,866 $
—
—
—
—
—
—
—
—
—
—
—
—
— $
20,636 $
21,888
21,903 $
—
—
— $
18,010
19,664 $
—
—
18,456 $
3,411
$
98,821
8
61
152
275
307
983
68
538
1,467
2,686
3,612
4,122
2,848
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
2019
2020
Total
(In thousands)
Accident Year
2014
2015
2016
2017
2018
2019
2020
Total
(1) Includes expected development on reported claims
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
$
267 $
1,005 $
836 $
854 $
857 $
860 $
— $
3,165 $
4,022 $
4,808 $
4,869 $
5,018
Unaudited
—
—
—
—
—
— $
7,751 $
10,939 $
12,343 $
12,400
—
—
—
—
— $
8,221 $
16,439 $
19,404
—
—
—
— $
9,918 $
17,248
—
—
— $
5,575
—
—
860
5,117
12,623
20,097
19,769
11,643
7,361
77,470
—
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
$
21,351
176
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Syndicate 1729 Property Reinsurance
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
December 31, 2020
($ in thousands)
Accident Year
2014
2015
2016
2017
2018
2019
2020
Total
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
Unaudited
Cumulative
Number of
Reported
Claims (2)
IBNR(1)
$
831 $
929 $
989 $
989 $
1,125 $
1,120 $
1,112 $
— $
2,788 $
2,825 $
2,275 $
2,328 $
— $
4,497 $
4,050 $
3,368 $
2,377
2,832
6,868
6,398
2,455 $
2,498 $
7,947 $
2,887 $
— $
6,861 $
7,832 $
— $
8,840 $
—
—
—
—
—
—
—
—
—
— $
10,977
13,333 $
—
—
8,400 $
$
38,632
—
—
—
—
—
—
59
98
44
590
1,704
3,032
nm
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
(In thousands)
Accident Year
2014
2015
2016
2017
2018
2019
2020
Total
2014
2015
2016
2017
2018
2019
2020
Year Ended December 31,
$
79 $
— $
—
—
—
—
—
Unaudited
917 $
984 $
984 $
1,125 $
1,120 $
1,313 $
1,804 $
1,996 $
2,234 $
— $
613 $
1,667 $
2,136 $
—
—
—
—
— $
4,147 $
7,300 $
—
—
—
— $
—
—
547 $
— $
—
2,267
2,192
8,947
1,644
4,974
—
1,112
2,303
2,215
7,563
1,663
8,575
3,931
27,362
All outstanding liabilities before 2014, net of reinsurance
Liabilities for losses and loss adjustment expenses, net of reinsurance
—
$
11,270
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years
1
2
3
4
5
6
7
8
9
10
Unaudited
Syndicate 1729 Casualty
3.2 % 17.5 % 24.5 % 18.4 % 11.9 %
8.5 %
5.8 %
3.7 %
2.0 %
0.3 %
Syndicate 1729 Property Insurance
Syndicate 1729 Property Reinsurance
33.5 % 58.9 %
7.7 %
37.8 % 49.1 % 13.0 %
—%
0.1 %
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
—%
177
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
Below is a reconciliation of the claims development information to the Consolidated Balance Sheet:
(In thousands)
December 31, 2020
Net outstanding liabilities
Healthcare Professional Liability claims-made
Healthcare Professional Liability occurrence
Medical Technology Liability claims-made
Workers' Compensation Insurance
Segregated Portfolio Cell Reinsurance - workers' compensation
Syndicate 1729 casualty
Syndicate 1729 property insurance
Syndicate 1729 property reinsurance
Other short-duration lines
$
1,207,246
215,920
31,207
151,809
53,704
51,575
21,351
11,270
94,621
Liabilities for losses and loss adjustment expenses, net of reinsurance
1,838,703
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)
Other
190,378
43,241
30,701
50,809
25,182
6,902
9,344
8,689
19,841
385,087
74,200
111,827
7,883
(521)
193,389
Gross liability for losses and loss adjustment expenses
$
2,417,179
(1) Represents the reserve for retroactive coverages, net of any applicable deferred gains, related to the loss portfolio
transfers entered into during 2019 and 2018.
178
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 in Note 1.
ProAssurance also has other direct actions against the Company unrelated to its claims activity which are evaluated and
accounted for as a part of other liabilities. For these corporate legal actions, the Company evaluates each case separately and
establishes what it believes is an appropriate reserve based on GAAP guidance related to contingent liabilities. As of
December 31, 2020 there were no material reserves established for corporate legal actions.
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 $41.0 million at December 31, 2020). The Syndicate Credit Agreement has a maturity date of
December 31, 2021 and contains 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 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, 2021, subject to extension through the auto-renewal feature. As of December 31, 2020, there were no outstanding
borrowings under the Syndicate Credit Agreement. ProAssurance provides FAL to support underwriting by Syndicate 1729 and
Syndicate 6131 and is comprised of investment securities and cash and cash equivalents deposited with Lloyd's with a total fair
value of approximately $106.2 million at December 31, 2020 (see Note 3). During 2020, ProAssurance received a return of
approximately $32.3 million of cash and cash equivalents from its FAL balances given the Company's reduced participation in
the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%.
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, 2020, ProAssurance had total
funding commitments related to non-public investment entities as well as the short-term loan commitment of approximately
$196.7 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, $0.7 million is related to qualified affordable housing project tax credit investments and is expected
to be paid as follows: $0.3 million in 2021, $0.3 million in 2022 and 2023 combined and $0.1 million in 2024 and 2025
combined. ProAssurance’s expected credit losses associated with this short-term loan commitment were nominal in amount as
of December 31, 2020.
In October 2018, ProAssurance entered into an agreement with a company for a minimum commitment of two years to
provide data analytics services for certain product lines within the Company's HCPL book of business. In October 2020,
ProAssurance executed an amendment to this agreement which extended the commitment an additional one year for an annual
fee of approximately $2.4 million and additional variable quarterly incentive fees based on service utilization metrics prescribed
in the contract. In addition, the amended agreement includes an optional three-month extension feature if notice is given at least
30 days prior to the end of the contract. ProAssurance incurred operating expenses associated with this agreement of $4.3
million and $4.9 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the
remaining commitment under this agreement was estimated to be approximately $1.8 million, which includes estimated variable
quarterly incentive fees.
ProAssurance has entered into a definitive agreement to acquire NORCAL, an underwriter of medical professional
liability insurance, subject to the demutualization of NORCAL Mutual, NORCAL's ultimate controlling party. Upon
satisfaction of the various remaining regulatory approvals required, both companies are anticipating to close the transaction in
the second quarter of 2021. Subject to NORCAL’s conversion from a mutual company to a stock company, ProAssurance has
agreed to acquire 100% of the converted company stock in exchange for base consideration of $450 million and contingent
consideration of up to an additional $150 million depending on the development of NORCAL’s ultimate losses over a three-
year period following the acquisition date. The actual final cost of the transaction could vary due to the ability of NORCAL’s
policyholders to elect forms of consideration other than stock in the demutualization transaction as provided by California
law. Those alternative consideration options are tied to an appraised value of NORCAL as determined by the California
insurance regulator rather than the price per share ProAssurance has agreed to pay for 100% of NORCAL assuming that all
policyholders elect to receive stock. Further, the transaction is subject to a number of closing conditions, including a maximum
179
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
threshold for one of the alternative forms of consideration in the demutualization, a minimum threshold for the number of
NORCAL shares tendered to ProAssurance, and various required regulatory approvals. The Agreement and Plan of Acquisition
is included as Exhibit 10.19 of this report.
180
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 eleven years; some of which include options to extend the leases for up to
fifteen 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 net lease expense as well as the reporting location in the
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2020 and 2019.
(In thousands)
Operating lease expense (1)
Sublease income (2)
Net lease expense
Location in the Consolidated
Statements of Income and
Comprehensive Income
Year Ended December 31
2020
2019
Operating expense
Other income
$
$
4,355 $
(143)
4,212 $
4,485
(152)
4,333
(1) Includes short-term lease costs and variable lease costs, if applicable. For the years ended December 31, 2020 and
2019, no short-term lease costs were recognized and variable lease costs were nominal in amount.
(2) Sublease income excludes rental income from owned properties of $2.5 million during each of the years ended
December 31, 2020 and 2019, which is included in other income. See “Item 2. Properties” for a listing of currently
owned properties.
The following table provides supplemental lease information for operating leases on the Consolidated Balance Sheet as of
December 31, 2020 and December 31, 2019.
($ in thousands)
Operating lease ROU assets
Operating lease liabilities
Weighted-average remaining lease term
Weighted-average discount rate
Year Ended December 31
2020
2019
$
$
19,013
20,116
$
$
21,074
22,051
8.31 years
8.74 years
2.97 %
3.08 %
The following table provides supplemental lease information for the Consolidated Statements of Cash Flows for the years
ended December 31, 2020 and 2019.
(In thousands)
Cash paid for amounts included in the measurement
of lease liabilities:
Year Ended December 31
2020
2019
Operating cash flows from operating leases
$
127 $
976
181
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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, 2020.
(In thousands)
$
2021
2022
2023
2024
2025
Thereafter
Total future minimum lease payments
Less: Imputed interest
Total operating lease liabilities
$
4,145
3,306
2,608
2,026
1,783
8,875
22,743
2,627
20,116
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%
(1.58% and 3.21%, 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,
2020
250,000 $ 250,000
December 31,
2019
$
36,113
286,113
1,400
37,617
287,617
1,796
284,713 $ 285,821
$
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 2.
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.
182
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
At December 31, 2020, 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
$
2021
2022
2023
2024
2025
Thereafter
Total principal payments
$
1,559
1,617
1,677
1,740
1,805
27,715
36,113
Revolving Credit Agreement
ProAssurance has a Revolving Credit Agreement with seven participating lenders. The Revolving Credit Agreement,
which expires November 2024, 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. ProAssurance's Revolving Credit
Agreement permits borrowings up to $250 million, and has available a $50 million accordion feature which, if successfully
subscribed, would expand the permitted borrowings to a maximum of $300 million. The 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, such as the planned acquisition of NORCAL (see Note 9).
Covenant Compliance
ProAssurance is currently in compliance with all covenants.
183
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
12. Shareholders’ Equity
At December 31, 2020 and 2019, 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.
The following is a summary of changes in common shares issued and outstanding during the years ended December 31,
2020, 2019 and 2018:
(In thousands)
2020
2019
2018
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
53,792
54
47
53,893
53,637
132
23
53,792
53,457
135
45
53,637
* Shares issued were valued at fair value (the market price of a ProAssurance common share on the date of issue).
As of December 31, 2020, approximately 1.6 million of ProAssurance's authorized common shares were reserved by the
Board for award or issuance under the incentive compensation plans described in Note 13 and an additional 0.5 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 2020, 2019 and 2018 as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fourth Quarter - Special dividend
Cash Dividends Declared, per Share
2020
2019
2018
$
$
$
$
$
0.31 $
0.05 $
0.05 $
0.05 $
— $
0.31 $
0.31 $
0.31 $
0.31 $
— $
0.31
0.31
0.31
0.31
0.50
Quarterly dividends were paid in the month following the quarter in which they were declared. Dividends declared during
2020, 2019 and 2018 totaled $24.8 million, $66.7 million and $94.3 million, respectively.
ProAssurance's ability to pay dividends to its shareholders is limited by its holding company structure, to the extent of the
net assets held by its insurance subsidiaries, as discussed in Note 18. Otherwise, there are no other regulatory restrictions on
ProAssurance's retained earnings or net income that materially impact its ability to pay dividends. Based on shareholders' equity
at December 31, 2020, total equity of $266.6 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, 2020, 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)
The following tables provide a detailed breakout of the components of AOCI and the amounts reclassified from AOCI to
net income (loss). The tax effects of all amounts in the tables below, except for an immaterial amount of unrealized gains and
losses on available-for-sale securities held at the Company's U.K. subsidiary, were computed using the enacted U.S. federal
corporate tax rate of 21%. For the years ended December 31, 2020 and 2019, OCI included a deferred tax expense of $9.6
million and $14.2 million, respectively, and a deferred tax benefit of $9.6 million for the year ended December 31, 2018.
184
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
The changes in the balance of each component of AOCI for the years ended December 31, 2020, 2019 and 2018 were as
follows:
(In thousands)
Balance December 31, 2019
OCI, before reclassifications, net of tax
Amounts reclassified from AOCI, net of tax
Net OCI, current period
Balance December 31, 2020
(In thousands)
Balance December 31, 2018
OCI, before reclassifications, net of tax
Amounts reclassified from AOCI, net of tax
Net OCI, current period
Balance December 31, 2019
(In thousands)
Balance December 31, 2017
Cumulative-effect adjustment(2)
OCI, before reclassifications, net of tax
Amounts reclassified from AOCI, net of tax
Net OCI, current period
Balance December 31, 2018
$
Unrealized
Investment Gains
(Losses)
Non-credit
Impairments
Unrecognized
Change in Defined
Benefit Plan
Liabilities(1)
Accumulated
Other
Comprehensive
Income (Loss)
$
$
37,333 $
46,383
(8,328)
38,055
75,388 $
(300) $
(187)
430
243
(57) $
(78) $
(26)
—
(26)
(104) $
36,955
46,170
(7,898)
38,272
75,227
Unrealized
Investment Gains
(Losses)
Non-credit
Impairments
Unrecognized
Change in Defined
Benefit Plan
Liabilities(1)
Accumulated
Other
Comprehensive
Income (Loss)
$
$
(16,733) $
56,041
(1,975)
54,066
37,333 $
Unrealized
Investment Gains
(Losses)
$
15,453 $
3,524
(35,494)
(216)
(35,710)
(16,733) $
(121) $
(179)
—
(179)
(300) $
(57) $
(21)
—
(21)
(78) $
(16,911)
55,841
(1,975)
53,866
36,955
Non-credit
Impairments
Unrecognized
Change in Defined
Benefit Plan
Liabilities(1)
Accumulated
Other
Comprehensive
Income (Loss)
(503) $
(108)
—
490
490
(121) $
(39) $
—
(18)
—
(18)
(57) $
14,911
3,416
(35,512)
274
(35,238)
(16,911)
(1) Represents the reestimation of the defined benefit plan liability assumed in the Eastern acquisition. The defined
benefit plan is frozen as to the earnings of additional benefits and the benefit plan liability is reestimated annually.
(2) Due to the adoption of ASU 2018-02, ProAssurance recorded a cumulative-effect adjustment as of January 1, 2018
which increased beginning AOCI and decreased retained earnings in order to reclassify stranded tax effects that
resulted from the change in enacted federal corporate tax rate from 35% to 21% as a result of the TCJA.
185
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
13. Share-Based Payments
Share-based compensation costs are primarily classified as a component of operating expense.
During 2020, 2019 and 2018, ProAssurance provided share-based compensation to employees utilizing two types of
awards: restricted share units and performance share units. During 2019 and 2018, ProAssurance also provided share-based
compensation to employees utilizing 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, 2020
($ in millions, except remaining recognition period)
2020
2019
2018
Amount
Weighted Average
Remaining
Recognition Period
Total share-based compensation expense
Tax benefit recognized
$
$
3.8 $
0.8 $
3.5 $
0.7 $
5.3
1.1
$
4.7
2.1
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, 2020,
share-based compensation expense related entirely 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.
Restricted Share Units
Activity for restricted share units during 2020, 2019 and 2018 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.
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
2020
2019
2018
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
320,625 $
111,758 $
(9,054) $
(83,525) $
339,804 $
43.99
29.18
40.13
56.74
36.09
267,323 $
164,196 $
(3,832) $
(107,062) $
320,625 $
49.16
36.96
45.09
46.06
43.99
Weighted
Average
Grant Date
Fair Value
Units
269,520 $
85,797 $
(3,878) $
(84,116) $
267,323 $
48.63
44.73
50.07
42.90
49.16
The aggregate grant date fair value of restricted share units vested and released in 2020, 2019 and 2018 totaled
$4.7 million, $4.9 million and $3.6 million, respectively. The aggregate intrinsic value of restricted share units vested and
released in 2020, 2019 and 2018 (including units paid in cash to cover tax withholdings) totaled $2.6 million, $4.6 million and
$4.1 million, respectively.
186
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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 2020, 2019 and 2018 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
Expired*
Vested and released
Ending non-vested balance
2020
2019
2018
Weighted
Average
Grant Date
Fair Value
Base Units
Weighted
Average
Grant Date
Fair Value
Base Units
100,370 $
38,609 $
— $
50.10
29.18
—
(48,000) $
58.35
135,202 $
25,168 $
— $
— $
— $
—
(60,000) $
90,979 $
36.87
100,370 $
49.95
40.18
—
—
45.59
50.10
Weighted
Average
Grant Date
Fair Value
47.11
44.73
—
—
42.79
49.95
Base Units
212,105 $
27,202 $
— $
— $
(104,105) $
135,202 $
*Represents performance share units that did not vest as minimum performance objectives were not achieved.
The aggregate grant date fair value of performance share units (base level) vested and released in 2019 and 2018 totaled
$2.7 million and $4.5 million, respectively; there were no performance share units vested and released in 2020 as minimum
performance objectives were not achieved. The aggregate intrinsic value of performance share units (base level) vested and
released in 2019 and 2018 (including units paid in cash to cover tax withholdings) totaled $2.6 million and $5.0 million,
respectively. The weighted average level at which the vested units were issued was 95% and 125% during 2019 and 2018,
respectively, based on performance levels achieved.
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 and 2018 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.
Beginning non-vested balance
Granted
Forfeited
Vested and released
Ending non-vested balance
2020
2019
2018
Weighted
Average
Grant Date
Fair Value
Units
Weighted
Average
Grant Date
Fair Value
Units
Units
Weighted
Average
Grant Date
Fair Value
— $
— $
— $
— $
— $
—
—
—
—
—
44,682 $
51.05
70,292 $
49.40
— $
(1,400) $
(43,282) $
— $
—
51.47
51.03
—
— $
(1,594) $
(24,016) $
44,682 $
—
50.19
46.28
51.05
The aggregate grant date fair value of purchase match units vested and released in 2019 and 2018 totaled $2.2 million and
$1.1 million, respectively. The aggregate intrinsic value of purchase match share units vested and released in 2019 and 2018
(including units paid in cash to cover tax withholdings) totaled $1.7 million and $1.1 million, respectively.
187
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
14. Variable Interest Entities
ProAssurance holds passive interests in a number of entities that are considered to be VIEs under GAAP guidance.
ProAssurance's VIE interests principally consist of interests in LPs/LLCs formed for the purpose of achieving diversified equity
and debt returns. ProAssurance's VIE interests, carried as a part of investment in unconsolidated subsidiaries, totaled
$282.2 million at December 31, 2020 and $309.0 million at December 31, 2019.
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. 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. 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, 2020, ProAssurance’s maximum loss exposure relative to these
investments was limited to the carrying value of ProAssurance’s investment in the VIE.
15. Earnings (Loss) 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 a reconciliation between the Company's basic weighted average number of common shares
outstanding to its diluted weighted average number of common shares outstanding:
(In thousands, except per share data)
2020
2019
2018
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
53,863
53,740
53,598
42
1
—
75
10
16
70
63
18
Weighted average number of common shares
outstanding, diluted
Effect of dilutive shares on earnings (loss) per
share
53,906
53,841
53,749
$
— $
— $
—
The diluted weighted average number of common shares outstanding for the years ended December 31, 2020 and 2018
excludes approximately 114,000 and 2,000, respectively, common share equivalents issuable under the Company's stock
compensation plans, as their effect would be antidilutive. There were no antidilutive common share equivalents for the year
ended December 31, 2019.
Dilutive common share equivalents are reflected in the earnings (loss) per share calculation while antidilutive common
share equivalents are not reflected in the earnings (loss) per share calculation. For the year ended December 31, 2020, all
incremental common share equivalents were not included in the computation of diluted earnings (loss) per share because to do
so would have been antidilutive.
188
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
16. Segment Information
ProAssurance's segments are based on the Company's internal management reporting structure for which financial results
are regularly evaluated by the Company's CODM to determine resource allocation and assess operating performance. The
Company continually assesses its internal management reporting structure and information evaluated by 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 comprised of medical professional liability products offered to healthcare providers and institutions. The
Company also offers, to a lesser extent, professional liability insurance 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 Company also offers custom alternative risk solutions including loss
portfolio transfers, assumed reinsurance 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 insurance products which are provided primarily 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 program
premiums 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 includes the 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 results of the SPCs are attributable to the participants of that
cell. ProAssurance participates to a varying degree in the results of selected SPCs. SPC results attributable to external cell
participants are reflected as 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 investment results of the SPCs 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.
Lloyd's Syndicates includes results from ProAssurance's participation in Lloyd's of London Syndicate 1729 and Syndicate
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 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. 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. For the 2020 underwriting year, ProAssurance decreased its participation in the
results of Syndicate 1729 to 29% from 61%; however, due to the quarter lag these changes were not reflected in the Company's
results until the second quarter of 2020. Syndicate 6131 is an SPA that underwrites on a quota share basis with Syndicate 1729.
Effective July 1, 2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an unaffiliated insurer.
Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the unaffiliated
insurer; the agreement was non-renewed on January 1, 2021. Due to the quarter lag, the effect of this reinsurance arrangement
was not reflected in our results until the fourth quarter of 2020.
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. ProAssurance evaluates
the performance of its Segregated Portfolio Cell Reinsurance segment based 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
189
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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. The tabular information that follows
shows the financial results of the Company's reportable segments reconciled to results reflected in the Consolidated Statements
of Income and Comprehensive Income. ProAssurance does not consider asset impairments, including goodwill and intangible
asset impairments, in assessing the financial performance of its operating and reportable segments, and thus are included in the
reconciliation of segment results to consolidated results.
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, 2020
Specialty
P&C
Workers'
Compensation
Insurance
Segregated
Portfolio Cell
Reinsurance
Lloyd's
Syndicates
Inter-
segment
Corporate
Eliminations Consolidated
$
477,365 $
171,772 $
66,352 $
77,226 $
— $
— $
792,715
—
—
—
—
—
—
3,908
2,216
1,084
4,128
66,786
—
3,085
205
—
988
51
(11,921)
11,605
2,531
—
—
—
—
(2,441)
71,998
(11,921)
15,678
6,470
—
(661,447)
Net losses and loss adjustment expenses
(470,074)
(111,552)
(29,605)
(50,216)
Underwriting, policy acquisition and
operating expenses(1)
SPC U.S. federal income tax expense(2)
SPC dividend (expense) income
Interest expense
Income tax benefit (expense)
(109,599)
(56,449)
(20,709)
(30,136)
(23,429)
2,441
(237,881)
—
—
—
—
—
—
—
—
(1,746)
(14,304)
—
—
—
—
—
29
—
—
(15,503)
41,300
—
—
—
—
(1,746)
(14,304)
(15,503)
41,329
Segment results
$
(98,400) $
5,987 $
4,362 $
2,070 $
71,369 $
— $
(14,612)
Reconciliation of segments to consolidated results:
Goodwill impairment
Net income (loss)
Significant non-cash items:
Goodwill impairment
Depreciation and amortization, net
of accretion
$
$
— $
— $
— $
— $
— $
— $
161,115
7,747 $
3,690 $
676 $
(4) $
9,266 $
— $
21,375
(161,115)
$
(175,727)
190
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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
4,551
87,140
—
4,020
559
—
768
(573)
(10,061)
55,086
3,478
—
—
—
—
(2,439)
93,269
(10,061)
59,874
9,220
—
(753,915)
(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
(532,485)
(121,649)
(52,412)
(47,369)
Underwriting, policy acquisition and
operating expenses(1)(3)
SPC U.S. federal income tax expense(2)(3)
SPC dividend (expense) income
Interest expense
Income tax benefit (expense)
Segment results
Net income (loss)
Significant non-cash items:
Depreciation and amortization, net of
accretion
(120,310)
(57,520)
(23,201)
(34,711)
(19,146)
2,439
(252,449)
—
—
—
—
—
—
—
—
(1,059)
(4,579)
—
—
—
—
—
—
—
—
(16,636)
29,808
—
—
—
—
(1,059)
(4,579)
(16,636)
29,808
$
(147,941) $
12,470 $
3,469 $
3,337 $
129,669 $
— $
1,004
$
1,004
$
6,586 $
3,825 $
(41) $
(7) $
8,302 $
— $
18,665
(In thousands)
Specialty
P&C
Workers'
Compensation
Insurance
Segregated
Portfolio Cell
Reinsurance
Lloyd's
Syndicates
Corporate
Inter-
segment
Eliminations
Consolidated
Net premiums earned
$
491,787 $
186,079 $
73,940 $
67,047 $
— $
— $
818,853
Year Ended December 31, 2018
Net investment income
Equity in earnings (loss) of unconsolidated
subsidiaries
Net realized gains (losses)
Other income (expense)(1)
—
—
—
—
—
—
5,844
2,412
1,566
3,358
86,960
—
(3,149)
211
—
(460)
322
8,948
(39,879)
3,525
—
—
—
—
91,884
8,948
(43,488)
(2,481)
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)(3)
SPC U.S. federal income tax expense(2)(3)
SPC dividend (expense) income
Interest expense
Income tax benefit (expense)
Segment results
Net income (loss)
Significant non-cash items:
Depreciation and amortization, net of
(112,419)
(55,693)
(22,060)
(31,686)
(18,767)
2,435
(238,190)
—
—
—
—
—
—
—
—
(366)
(9,122)
—
—
—
—
—
—
—
(16,163)
317
17,715
—
—
46
—
(366)
(9,122)
(16,117)
18,032
$
781 $
14,315 $
2,294 $
(12,672) $
42,339 $
— $
47,057
$
47,057
accretion
$
7,050 $
3,850 $
441 $
(8) $
9,922 $
— $
21,255
(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) Represents the provision for U.S. federal income taxes for SPCs at Inova Re, which have elected to be taxed as a U.S. corporation under Section 953(d) of
the Internal Revenue Code. U.S. federal income taxes are included in the total SPC net results and are paid by the individual SPCs.
(3) In ProAssurance's December 31, 2019 and 2018 reports on Form 10-K, underwriting, policy acquisition and operating expenses for 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 (see footnote 2). Beginning in 2020, this tax provision is now presented as a separate line item on the
Consolidated Statements of Income and Comprehensive Income as SPC U.S. federal income tax expense. To conform to the current year presentation,
ProAssurance has recast underwriting, policy acquisition and operating expenses for the years ended December 31, 2019 and 2018.
191
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
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)
2020
2019
2018
Year Ended December 31
Specialty P&C Segment
Gross premiums earned:
HCPL
Small business unit
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)
HCPL (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
$
411,716 $
434,867 $
433,193
104,376
34,909
821
(74,457)
477,365
184,204
71,280
(83,712)
171,772
68,518
6,594
—
(8,760)
66,352
109,876
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
111,204
35,157
468
(88,235)
491,787
199,466
83,508
(96,895)
186,079
78,255
5,009
—
(9,324)
73,940
98,990
(21,764)
77,226
101,222
(20,551)
80,671
83,307
(16,260)
67,047
Consolidated net premiums earned
$
792,715 $
847,532 $
818,853
(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 a nominal amount of premium assumed from the Specialty P&C segment for the year ended December 31, 2019
and $5.0 million for year ended December 31, 2018.
192
ProAssurance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2020
17. Benefit Plans
ProAssurance maintains the ProAssurance Savings Plan that provides a vehicle for eligible employees to build retirement
income. For the first half of 2020 and for the years ended December 31, 2019 and 2018, ProAssurance provided employer
contributions to the plan of up to 10% of eligible contributions for qualified employees. Given the Company’s current earnings
profile and the effects that underlying conditions in the broader insurance marketplace continue to have on the Company’s
results, the maximum employer contribution to the plan was reduced to 5% from 10% of eligible contributions for qualified
employees effective July 2020. ProAssurance incurred expense related to the ProAssurance Savings Plan of $5.5 million, $7.2
million and $7.0 million during the years ended December 31, 2020, 2019 and 2018, respectively.
ProAssurance also maintains the ProAssurance Plan that allows eligible management employees to defer a portion of their
current salary. ProAssurance incurred nominal expense related to the ProAssurance Plan in each of the years ended
December 31, 2020, 2019 and 2018. ProAssurance deferred compensation liabilities totaled $30.3 million and $26.8 million at
December 31, 2020 and 2019, respectively. The liabilities included amounts due under the ProAssurance Plan and amounts due
under individual agreements with current or former employees.
18. Statutory Accounting and Dividend Restrictions
ProAssurance’s domestic U.S. insurance subsidiaries are required to file statutory financial statements with state insurance
regulatory authorities, prepared based upon SAP prescribed or permitted by regulatory authorities. ProAssurance did not use
any prescribed or permitted SAP that differed from the NAIC's SAP at December 31, 2020, 2019 or 2018. The most significant
differences between net income (loss) prepared in accordance with GAAP and statutory net income (loss) are generally due to:
(a) policy acquisition and certain software and equipment costs which are deferred under GAAP but expensed for statutory
purposes, (b) certain deferred income taxes which are recognized under GAAP but are not recognized for statutory purposes, (c)
net unrealized gains or losses which are included in shareholders' equity related to available-for-sale fixed maturity securities
carried at fair value under GAAP but are principally carried at amortized cost for statutory purposes and (d) accounting for
goodwill and intangible assets.
The NAIC specifies risk-based capital requirements for property and casualty insurance providers. At December 31, 2020,
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
2020
$81
2019
($22)
2018
$135
2020
$831
2019
$878
At December 31, 2020, $1.1 billion of ProAssurance's consolidated net assets were held at its domestic insurance
subsidiaries, of which approximately $87 million are permitted to be paid as dividends over the course of 2021 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. In addition, ProAssurance makes 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).
193
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, 2020
Recorded
Cost
Basis
Fair
Value
Amount Which is
Presented
in the
Balance Sheet
U.S. Government or government agencies and authorities
$
134,567 $
137,964 $
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
316,022
30,591
63,550
1,202,963
661,789
2,409,482
290
14,904
98,515
113,709
328,843
337,672
332,920
32,450
67,251
1,259,016
676,386
2,505,987
346
13,810
105,945
120,101
425,444
337,813
137,964
332,920
32,450
67,251
1,259,016
676,386
2,505,987
346
13,810
105,945
120,101
425,444
337,813
Total Investments
$
3,189,706 $
3,389,345 $
3,389,345
194
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,
2020
December 31,
2019
$
1,383,527 $
1,534,367
33,824
115,198
915
55,469
28,778
85,263
63,992
915
65,956
40,640
$
1,617,711 $
1,791,133
$
10,696 $
2,694
6,361
248,750
268,501
9,899
16,676
4,268
248,377
279,220
632
631
1,348,578
1,349,210
1,511,282
1,511,913
$
1,617,711 $
1,791,133
195
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 (loss)
Other comprehensive income (loss)
Comprehensive income
Year Ended December 31
2020
2019
2018
$
331 $
2,694 $
3,495
—
2,194
12
2,537
14,260
21,458
35,718
(33,181)
11,404
(44,585)
(131,142)
(175,727)
38,272
40
19
795
3,548
14,074
16,653
30,727
(27,179)
(28,455)
1,276
(272)
1,004
53,866
(325)
(789)
977
3,358
14,844
17,092
31,936
(28,578)
(7,142)
(21,436)
68,493
47,057
(35,238)
$
(137,455) $
54,870 $
11,819
196
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
$
(21,450) $
20,055 $
27,981
Year Ended December 31
2020
2019
2018
Investing activities
Proceeds from sales or maturities of:
Fixed maturities, available for sale
Net decrease (increase) in short-term investments
Dividends from subsidiaries
Contribution of capital to subsidiaries
Funds (advanced) repaid for Lloyd's FAL deposit
Funds (advanced) repaid under Syndicate Credit Agreement
Other
Net cash provided (used) by investing activities
Financing activities
Borrowings (repayments) under Revolving Credit Agreement
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
87,101
(51,206)
79,486
(97,541)
32,256
—
(2,206)
47,890
—
2,846
(38,664)
(1,109)
(36,927)
(10,487)
65,956
27,974
12,603
52,499
—
(4,894)
30,296
(936)
169,822
194,035
29,395
—
(21,576)
(11,232)
330
117,542
360,774
—
344
(93,204)
(4,538)
(97,398)
40,199
25,757
(123,000)
1,154
(316,476)
(5,685)
(444,007)
(55,252)
81,009
25,757
$
55,469 $
65,956 $
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
$
$
$
$
(9,117) $
2,053 $
13,888 $
13,699 $
4,966
14,777
2,694 $
34,915 $
16,676 $
34,897 $
43,446
98,292
Basis of Presentation
The registrant-only financial statements should be read in conjunction with ProAssurance Corporation’s Consolidated
Financial Statements and Notes thereto.
At December 31, 2020 and 2019, 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.
197
ProAssurance Corporation and Subsidiaries
Schedule III – Supplementary Insurance Information
(In thousands)
2020
2019
2018
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 (2)
Lloyd's Syndicates
Corporate
Inter-segment eliminations
Consolidated
Continued on the following page.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
477,365 $
171,772
66,352
77,226
792,715 $
1,084 $
4,128
66,786
71,998 $
497,554 $
118,523
46,200
49,569
711,846 $
(27,480) $
(6,971)
(16,595)
647
(50,399) $
379,656 $
118,496
46,267
40,897
(143)
585,173 $
53,562 $
15,895
19,636
21,597
(125)
110,565 $
56,037 $
40,554
1,073
8,539
23,429
(2,316)
127,316 $
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
1,484
13,319
19,146
(911)
137,119 $
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
1,021
15,773
18,767
(867)
133,689
198
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
2020
2019
2018
$
$
451,019 $
164,871
64,159
67,652
747,701 $
495,750 $
182,233
77,639
87,103
842,725 $
494,148
195,350
75,547
69,869
834,914
$
$
$
47,196 $
2,417,179 $
361,547 $
Deferred policy acquisition costs (1)
Reserve for losses and loss adjustment expenses (1)
Unearned premiums (1)
(1) Assets are not allocated to segments because investments, other than the investments 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. See Note 16 of the
Notes to Consolidated Financial Statements for additional information.
(2) In ProAssurance's December 31, 2019 and 2018 reports on Form 10-K, underwriting, policy acquisition and operating expenses for 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. Beginning in 2020, this tax provision is now presented
as a separate line item on the Consolidated Statements of Income and Comprehensive Income as SPC U.S. federal income tax expense.
To conform to the current year presentation, ProAssurance has recast underwriting, policy acquisition and operating expenses for the
years ended December 31, 2019 and 2018.
55,567 $
2,346,526 $
413,086 $
54,116
2,119,847
415,211
199
ProAssurance Corporation and Subsidiaries
Schedule IV - Reinsurance
($ in thousands)
Property and Liability *
Premiums earned
Premiums ceded
Premiums assumed
2020
2019
2018
$
862,742 $
926,035 $
903,354
(113,582)
(124,171)
(126,036)
43,555
45,668
41,535
Net premiums earned
$
792,715 $
847,532 $
818,853
Percentage of amount assumed to net
5.49%
5.39%
5.07%
* All of ProAssurance’s premiums are related to property and liability coverages.
200
Exhibit
Number
3.1(a)
3.1(b)
3.2
4.1
4.2
EXHIBIT INDEX
Description
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.
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.
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.
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.*
10.1(a)
10.2
10.2(a)
10.2(b)
10.2(c)
10.3
201
10.4
Form of Indemnification Agreement between ProAssurance and each of the following named executive
officers and directors of ProAssurance*:
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.
10.5
10.6
10.7
10.7(a)
10.7(b)
10.7(c)
10.8
10.8(a)
10.8(b)
10.8(c)
Filed as an Exhibit to ProAssurance’s Definitive Proxy Statement (File No. 001-16533) on April 11,
2008 and incorporated herein by reference pursuant to SEC Rule 12b-32.
ProAssurance Group Employee Benefit Plan which includes the Executive Supplemental Life Insurance
Program (Article VIII), filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 001-16533) and incorporated herein by reference pursuant to SEC
Rule 12b-32.*
Amendment and Restatement of the Executive Non-Qualified Excess Plan and Trust effective January 1,
2008, filed as an Exhibit to ProAssurance’s Annual Report on Form 10-K for the year ended
December 31, 2007 (File No. 001-16533) and incorporated herein by this reference pursuant to SEC
Rule 12b-32.*
Director Deferred Compensation Plan as amended and restated December 7, 2011, filed as an Exhibit to
ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2011 (File No.
001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*
Amendment No. 1 to the Amended and Restated Director Deferred Compensation Plan dated May 22,
2013, filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ended June
30, 2013 (File No. 001-16533) and incorporated herein by reference pursuant to SEC Rule 12b-32.*
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.
202
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.*
203
10.18
10.19
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.*
Agreement and Plan of Acquisition by and among ProAssurance Corporation, PRA Professional
Liability Group, Inc. and NORCAL Mutual Insurance Company dated as of February 20, 2020 filed as
an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (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
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Labels Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* Denotes a management contract or compensatory plan, contract or arrangement required to be filed as an Exhibit to this report.
204
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 effects of the items listed in
the following table that do not reflect normal 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
(loss) computed in accordance with GAAP.
Reconciliation of net income (loss) to Non-GAAP operating income (loss):
Year Ended December 31,
(In thousands, except per share data)
2020
2019
2018
2017
2016
Net income (loss)
$
(175,727) $
1,004 $
47,057 $
107,264 $
151,081
Items excluded in the calculation of Non-GAAP
operating income (loss):
Net realized investment (gains) losses
(15,678)
(59,874)
43,488
(16,409)
(34,875)
Net realized gains (losses) attributable to SPCs
which no profit/loss is retained (1)
Goodwill impairment
Guaranty fund assessments (recoupments)
Pre-tax effect of exclusions
Tax effect (2)
After-tax effect of exclusions
2,436
3,144
(2,535)
3,083
2,049
161,115
97
—
43
—
148
—
(157)
—
153
147,970
(56,687)
41,101
(13,483)
(32,673)
16
11,904
147,986
(44,783)
(8,631)
32,470
4,719
11,436
(8,764)
(21,237)
Non-GAAP operating income (loss), before tax reform
adjustments
(27,741)
(43,779)
79,527
98,500
129,844
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)
—
—
—
6,541
—
—
—
3,497
—
—
Non-GAAP operating income (loss)
$
(27,741) $
(43,779) $
79,527 $
108,538 $
129,844
Per diluted common share:
Net income (loss)
Effect of exclusions
Non-GAAP operating income (loss) per diluted
common share
$
$
(3.26) $
0.02 $
2.74
(0.83)
0.88 $
0.60
2.00 $
0.02
2.83
(0.40)
(0.52) $
(0.81) $
1.48 $
2.02 $
2.43
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment. SPC
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 statutory tax rate for 2018 through 2020 is 21% as compared to 35% for 2017 and 2016, associated with the taxable or tax deductible items
listed above. The taxes associated with the net realized investment gains (losses) related to SPCs in our Segregated Portfolio Cell Reinsurance
segment are paid by the individual SPCs and are not included in our consolidated tax provision or net income (loss); therefore, both the net
realized investment gains (losses) from our Segregated Portfolio Cell Reinsurance segment and the adjustment to exclude the portion of net
realized investment gains (losses) included in the SPC dividend expense (income) in the table above are not tax effected. The portion of 2020
goodwill impairment loss that is tax deductible was tax affected at the statutory tax rate (21%). The remaining portion of the 2020 goodwill
impairment loss is not tax deductible and therefore had no associated income tax benefit.
(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 10-K, and was not filed with the Securities & Exchange
Commission.
Appendix A
INVESTOR INFORMATION
There were 53,893,267 shares of ProAssurance Corporation
There were 53,893,267 shares of ProAssurance Corporation
common stock outstanding at March 15, 2021. On that
common stock outstanding at March 15, 2021. On that
date, we had 2,522 shareholders of record. Our common
date, we had 2,522 shareholders of record. Our common
stock trades on The New York Stock Exchange under the
stock trades on The New York Stock Exchange under the
symbol PRA. The price of our stock is available from any
symbol PRA. The price of our stock is available from any
website that provides stock quotes. We also post the price
website that provides stock quotes. We also post the price
of our stock on our website, ProAssurance.com.
of our stock on our website, ProAssurance.com.
YOUR SHARES
If you hold your shares through a brokerage account, your
If you hold your shares through a brokerage account, your
broker or a customer service representative at that firm
broker or a customer service representative at that firm
should be able to answer questions about your holdings.
should be able to answer questions about your holdings.
If you hold your shares in certificate form, or have shares
If you hold your shares in certificate form, or have shares
held in direct registration (DRS), you are a “registered
held in direct registration (DRS), you are a “registered
holder.” Registered holders may contact our transfer agent,
holder.” Registered holders may contact our transfer agent,
Computershare, for address changes, transfer of certif-
Computershare, for address changes, transfer of certif-
icates, and replacement of share certificates that have
icates, and replacement of share certificates that have
been lost or stolen. You may reach Computershare in a
been lost or stolen. You may reach Computershare in a
variety of ways:
variety of ways:
By Phone
By Phone
(800) 851-4218 or (201) 680-6578
(800) 851-4218 or (201) 680-6578
By Internet
Information about your account including share transfer,
Information about your account including share transfer,
direct deposit of dividends and your dividend payment
direct deposit of dividends and your dividend payment
history: www-us.computershare.com/Investor/.
history: www-us.computershare.com/Investor/.
For immediate access to tax forms:
For immediate access to tax forms:
www-us.computershare.com/Investor/#QuickTax.
www-us.computershare.com/Investor/#QuickTax.
For technical assistance with the Computershare website,
For technical assistance with the Computershare website,
please phone (800) 942-5909.
please phone (800) 942-5909.
By Mail
By Mail
Computershare
Computershare
P. O. Box 30170
P. O. Box 30170
College Station, TX 77842
College Station, TX 77842
Computershare
Computershare
211 Quality Circle, Suite 210
211 Quality Circle, Suite 210
College Station, TX 77845
College Station, TX 77845
DIRECT DEPOSIT OF DIVIDENDS FOR REGISTERED HOLDERS
We encourage registered holders to have dividends
We encourage registered holders to have dividends
deposited directly into a designated account to ensure
deposited directly into a designated account to ensure
prompt, secure delivery of your funds. You may arrange
prompt, secure delivery of your funds. You may arrange
for Direct Deposit by updating your banking details with
for Direct Deposit by updating your banking details with
Computershare (www-us.computershare.com/Investor/
Computershare (www-us.computershare.com/Investor/
myProfile) once you have established online access to
myProfile) once you have established online access to
your account with Computershare.
your account with Computershare.
CORPORATE GOVERNANCE AND COMPLIANCE WITH REG-
ULATORY AND NEW YORK STOCK EXCHANGE
REQUIREMENTS
We invite you to visit the Investor Relations and Corpo-
We invite you to visit the Investor Relations and Corpo-
rate Governance sections of our website, http://investor.
rate Governance sections of our website, http://investor.
proassurance.com. There you will find important
proassurance.com. There you will find important
information about our Company, including our Corporate
information about our Company, including our Corporate
Governance Principles and Code of Ethics and Conduct,
Governance Principles and Code of Ethics and Conduct,
which were developed and adopted by our Board of
which were developed and adopted by our Board of
Directors. The Governance section of our website (http://
Directors. The Governance section of our website (http://
investor.proassurance.com/govdocs) also provides copies
investor.proassurance.com/govdocs) also provides copies
of the Board-adopted charters for our Audit, Compensation,
of the Board-adopted charters for our Audit, Compensation,
and Nominating/Corporate Governance Committees and
and Nominating/Corporate Governance Committees and
our Internal Audit Charter. Our Corporate Governance
our Internal Audit Charter. Our Corporate Governance
section also provides information such as stock ownership
section also provides information such as stock ownership
guidelines, committee composition and leadership, and
guidelines, committee composition and leadership, and
director independence, including categorical standards
director independence, including categorical standards
to assist in determining independence. Our Corporate
to assist in determining independence. Our Corporate
Responsibility section provides information such as our
Responsibility section provides information such as our
Human Rights policy, our Environmental Commitment,
Human Rights policy, our Environmental Commitment,
and diversity within ProAssurance.
and diversity within ProAssurance.
Our filings with the Securities and Exchange Commission
Our filings with the Securities and Exchange Commission
(SEC) are available in the Investor Relations section of
(SEC) are available in the Investor Relations section of
our website (http://investor.proassurance.com/Docs).
our website (http://investor.proassurance.com/Docs).
Our SEC filings are also available in the EDGAR section
Our SEC filings are also available in the EDGAR section
of the SEC’s website (www.sec.gov/edgar.shtml).
of the SEC’s website (www.sec.gov/edgar.shtml).
Edward L. Rand, Jr., our President and Chief Executive
Edward L. Rand, Jr., our President and Chief Executive
Officer, submitted the required Section 12(a) CEO Cer-
Officer, submitted the required Section 12(a) CEO Cer-
tification to the New York Stock Exchange on May 21,
tification to the New York Stock Exchange on May 21,
2020. Additionally, we have been timely in the filing of
2020. Additionally, we have been timely in the filing of
CEO/CFO certifications as required in Section 302 of the
CEO/CFO certifications as required in Section 302 of the
Sarbanes-Oxley Act. These certifications are published as
Sarbanes-Oxley Act. These certifications are published as
exhibits in our Form 10-K filed with the SEC on February
exhibits in our Form 10-K filed with the SEC on February
26, 2021.
26, 2021.
INVESTOR RELATIONS
The Investor Relations section of our website
The Investor Relations section of our website
(http://investor.proassurance.com) also contains detailed
(http://investor.proassurance.com) also contains detailed
financial information, a dividend payment history, SEC
financial information, a dividend payment history, SEC
filings, the latest news releases about the Company and
filings, the latest news releases about the Company and
our latest presentation materials. We also maintain an
our latest presentation materials. We also maintain an
archive of presentation materials, although you should
archive of presentation materials, although you should
realize that archived information, by its very nature, may
realize that archived information, by its very nature, may
no longer be accurate.
no longer be accurate.
OBTAINING INFORMATION DIRECTLY FROM
PROASSURANCE
Any of the documents mentioned above may be obtained
Any of the documents mentioned above may be obtained
from our Communications and Investor Relations
from our Communications and Investor Relations
Department using one of the contact methods below:
Department using one of the contact methods below:
By Email
By Email
Investor@ProAssurance.com
Investor@ProAssurance.com
By U. S. Postal Service
By U. S. Postal Service
ProAssurance Corporation
ProAssurance Corporation
Investor Relations
Investor Relations
P. O. Box 590009
P. O. Box 590009
Birmingham, AL 35259-0009
Birmingham, AL 35259-0009
By Phone or Fax
By Phone or Fax
Phone: (205) 877-4400 / (800) 282-6242
Phone: (205) 877-4400 / (800) 282-6242
Fax: (205) 802-4799
Fax: (205) 802-4799
ANNUAL MEETING
The 2021 Annual Meeting is scheduled for 9:00 AM CDT
The 2021 Annual Meeting is scheduled for 9:00 AM CDT
on Tuesday, May 25, 2021 at the headquarters of
on Tuesday, May 25, 2021 at the headquarters of
ProAssurance Corporation, 100 Brookwood Place,
ProAssurance Corporation, 100 Brookwood Place,
Birmingham, Alabama 35209.
Birmingham, Alabama 35209.
100 Brookwood Place
Birmingham, Alabama 35209
205-877-4400 • 800-282-6242
www.ProAssurance.com
®