Basis of Presentation (Policies)

6 Months Ended

Jun. 30, 2021

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation, its wholly owned subsidiaries and VIEs in which ProAssurance is the primary beneficiary (ProAssurance, PRA or the Company). See Note 13 for more information on ProAssurance's VIE interests. The financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. ProAssurance’s results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2020 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to June 30, 2021 for recognition or disclosure in its financial statements and notes to financial statements. Please see Note 17 for additional information.

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 15.

Certain insignificant prior period amounts have been reclassified to conform to the current period presentation.

Accounting Policies

Accounting Policies

The preparation of financial statements in conformity with GAAP requires the Company 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. 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, including the potential impacts of the COVID-19 pandemic (see "Item 1A, Risk Factors" in ProAssurance's December 31, 2020 report on Form 10-K for additional information). 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.

Except as described below, the significant accounting policies followed by ProAssurance in making estimates that materially affect financial reporting are summarized in Note 1 of the Notes to Consolidated Financial Statements in ProAssurance’s December 31, 2020 report on Form 10-K.

VOBA

VOBA

VOBA is based on actuarially determined projections and reflects the estimated fair value of in-force contracts acquired in a business combination. VOBA is recorded as an asset when the in-force contracts acquired are expected to generate underwriting income and is recorded as a liability when the in-force contracts acquired are expected to generate an underwriting loss. VOBA liabilities (negative VOBA) are recorded as a component of the reserve for losses and loss adjustment expenses on the Condensed Consolidated Balance Sheet. To the extent negative VOBA relates to unearned premium, it is amortized over a period in proportion to the earn-out of the premium as a reduction to current accident year net losses and loss adjustment

expenses. To the extent negative VOBA relates to the DDR reserve, it is amortized over a period in proportion to the approximate consumption of losses as a reduction to prior accident year net losses and loss adjustment expenses. See Note 2 for more information.

Business Combination, Contingent Consideration, Accounting Policies Acquired, and Other Assets and Liabilities

Business Combinations

The Company accounted for our acquisition of NORCAL in accordance with GAAP relating to business combinations which required management to make certain estimates and assumptions including determining the fair value of the non-cash components of the acquisition consideration and the acquisition date fair values of the acquired tangible and identifiable intangible assets and assumed liabilities of NORCAL. Subsequent to the preliminary valuation of the non-cash components of the purchase consideration and net assets acquired, any adjustment identified associated with the purchase price allocation will be evaluated to determine whether the adjustment represents a measurement period adjustment in accordance with GAAP. If the adjustment is deemed to be a measurement period adjustment and is identified within one year of the acquisition, then the measurement period adjustment will be recorded in the current reporting period with a corresponding adjustment to the gain on bargain purchase.

Contingent Consideration

Contingent consideration in a business combination that is classified as a liability is measured at fair value on the acquisition date and remeasured to fair value each reporting period with changes in the fair value recorded in earnings

Accounting Policies Acquired

The significant accounting policies adopted as a result of the acquisition of NORCAL on May 5, 2021 and followed by ProAssurance in making estimates that materially affect financial reporting are summarized below.

Other Assets and Liabilities

Other assets include the acquired NORCAL investments in a deferred compensation rabbi trust which are carried at fair value. These rabbi trust assets are related to other liabilities associated with funded deferred compensation agreements with NORCAL employees and previous members of NORCAL's Board of Directors.

Other liabilities include the assumed NORCAL liability for deferred compensation balances associated with the rabbi trust assets and the reported balance is determined based on the amount of elective deferrals and employer contributions adjusted for periodic changes in fair value of the participant balances based on the performance of the funds selected by the participants.

ProAssurance recognizes the net change in the fair value of the rabbi trust assets and associated deferred compensation liabilities as a component of net investment income during the period of change.

Pension

Pension

As a result of the NORCAL acquisition, the Company sponsors a frozen defined benefit pension plan which covers substantially all NORCAL employees (except those that were previous employees of Medicus Insurance Company and FD Insurance Company), employees of PPM RRG as well as new hires after December 31, 2013. Accounting for pension benefits requires the use of assumptions for the valuation of the PBO and the expected performance of the plan assets.

The Company uses December 31 as the measurement date for calculating its obligation related to this defined benefit pension plan. The PBO for pension benefits represents the present value of all future benefits earned as of the measurement date for vested and non-vested employees. At each measurement date, the Company reviews the various assumptions impacting the amounts recorded for the pension plan including the discount rates, which impacts the recorded value of the PBO and interest costs, and the expected return on plan assets.

To estimate the discount rate at the measurement date, the Company uses a bond yield curve model, developed based on pricing and yield information for high quality corporate bonds. The assumption for the expected return on plan assets is based on the anticipated returns that will be earned by the portfolio over the long term. The expected return is influenced, but not determined, by historical portfolio performance.

Accounting standards provide for the delayed recognition of differences between actual results and expected or estimated results. This delayed recognition of the differences is amortized into earnings over time. The differences between actual results and expected or estimated results are recognized in full in AOCI. Amounts recognized in AOCI are reclassified to earnings in a systematic manner over the average future service period of participants. Due to the acquisition of NORCAL and the application of GAAP purchase accounting, there were no amounts recorded in AOCI as of June 30, 2021.

Accounting Changes Adopted and Not Yet Adopted

Accounting Changes 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 adopted the guidance beginning January 1, 2021, and adoption had no material effect on ProAssurance's results of operations, financial position or cash flows.

Accounting Changes Not Yet Adopted

ProAssurance is not aware of any accounting changes not yet adopted as of June 30, 2021 that could have a material impact on its results of operations, financial position or cash flows.

Credit Losses

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. See Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K for further information on how the Company estimates and measures expected credit losses on its premiums receivable and reinsurance receivables. ProAssurance's available-for-sale fixed maturity investments are also exposed to credit losses. See Note 4 for information on ProAssurance's allowance for expected credit losses on its available-for-sale fixed maturities.

ProAssurance’s premiums receivable on its Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 is reported net of the related allowance for expected credit losses of $7.7 million and $6.1 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 three and six months ended June 30, 2021 and 2020.

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, April 1, 2021	$	210,560	$	6,082
Initial allowance recognized in the period for NORCAL premiums receivable(1)			2,137
Provision for expected credit losses			352
Write offs charged against the allowance			(886)
Recoveries of amounts previously written off			44
Balance, June 30, 2021	$	288,589	$	7,729

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, December 31, 2020	$	201,395	$	6,131
Initial allowance recognized in the period for NORCAL premiums receivable(1)			2,137
Provision for expected credit losses			457
Write offs charged against the allowance			(1,118)
Recoveries of amounts previously written off			122
Balance, June 30, 2021	$	288,589	$	7,729

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, April 1, 2020	$	266,822	$	6,197
Provision for expected credit losses			405
Write offs charged against the allowance			(16)
Recoveries of amounts previously written off			41
Balance, June 30, 2020	$	234,840	$	6,627

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, December 31, 2019	$	249,540	$	1,590
Cumulative-effect adjustment, before tax (2)			5,160
Provision for expected credit losses			493
Write offs charged against the allowance			(674)
Recoveries of amounts previously written off			58
Balance, June 30, 2020	$	234,840	$	6,627
(1) Represents an initial allowance for expected credit losses for NORCAL's premiums receivable to conform NORCAL to ProAssurance's accounting policies. See Note 2 for more information.
(2) Due to the adoption of ASU 2016-13, ProAssurance recorded a cumulative-effect adjustment to beginning retained earnings as of January 1, 2020 to increase its consolidated allowance for expected credit losses related to its premiums receivable. See Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K.

ProAssurance’s expected credit losses associated with its reinsurance receivables (related to both paid and unpaid losses) were nominal in amount as of June 30, 2021 and 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 June 30, 2021 and December 31, 2020.

Fair Value Measurement

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 as of June 30, 2021 and 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 June 30, 2021, 60% of the securities were rated and the average rating was BBB. At December 31, 2020, 100% of the securities were rated and the average rating was BB+.

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 June 30, 2021, 86% of the securities were rated and the average rating was AA-. At December 31, 2020, 51% of the securities were rated and the average rating was AA-.

Equity Securities consisted of a preferred stock and a mutual fund for which limited observable inputs were available at June 30, 2021. The equity securities were primarily priced using broker/dealer quotes and internal models with some inputs that are unobservable.

Other investments consisted of convertible securities for which limited observable inputs were available at June 30, 2021. 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.

Other liabilities consisted of the contingent consideration which is a portion of the purchase price for the NORCAL acquisition and is recorded at fair value each reporting period. The ultimate payout under the contingent consideration is dependent on the after-tax development of NORCAL's ultimate net losses over a three-year period beginning December 31, 2020 and may total up to $84 million. See further discussion around the contingent consideration in Note 2 and Note 9.

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 15. See Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K for further information on how the Company tests goodwill for impairment.

Of the Company's five reporting units, two have net goodwill: Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance.