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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes 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:
December 31
(In thousands)20212020
Deferred tax assets
Unpaid loss discount$51,562 $36,452 
Unearned premium adjustment22,846 14,835 
Compensation related18,575 10,935 
Basis differentials-investments— 2,595 
Intangibles13,915 522 
Operating lease liabilities4,290 4,224 
Tax credit carryforward48,701 36,155 
Net operating loss carryforward18,596 9,244 
Other909 1,700 
Total gross deferred tax assets179,394 116,662 
Valuation allowance(8,945)(8,581)
Total deferred tax assets, net of valuation allowance170,449 108,081 
Deferred tax liabilities
Deferred policy acquisition costs(12,284)(8,929)
Unpaid loss discount-transition(7,276)(6,297)
Unrealized gains on investments, net(4,100)(19,351)
Fixed assets(4,013)(4,441)
Operating lease ROU assets(4,030)(4,015)
Basis differentials-investments(11,277)— 
Basis differentials-foreign operations(828)(790)
Intangibles(9,028)(7,153)
Total deferred tax liabilities(52,836)(50,976)
Net deferred tax assets (liabilities)$117,613 $57,105 
As of December 31, 2021, ProAssurance had U.S. federal, U.S. state and U.K. income tax NOL carryforwards of approximately $43.6 million, $74.2 million and $26.6 million, respectively. The U.K. NOL carryforwards do not expire while the U.S. federal and state NOL carryforwards will begin to expire in 2035 and 2031, respectively.
As a result of the NORCAL acquisition, the Company has U.S. federal NOL carryforwards which as of December 31, 2021 were approximately $43.0 million. These NOL carryforwards are subject to limitation by Internal Revenue Code Section 382 and will begin to expire in 2035. See Note 2 for more information on the NORCAL acquisition.
ProAssurance had $48.7 million of available tax credit carryforwards generated from the Company's investments in tax credit partnerships, of which $46.7 million may be carried forward until they begin to expire in December 31, 2039. Approximately $2.0 million of the tax credits earned in the current year were utilized during 2021. The remaining tax credits have been deferred and carried forward due to the utilization of NOLs available to ProAssurance following its acquisition of NORCAL.
The Company's total valuation allowance increased by $0.4 million and $3.1 million for the years ended December 31, 2021 and 2020, respectively.
In 2021, management evaluated the realizability of the deferred tax assets of ProAssurance American Mutual, a Risk Retention Group, and concluded that it was more likely than not that the net deferred tax assets will not be realized; therefore a nominal valuation allowance was recorded in 2021. ProAssurance American Mutual, a Risk Retention Group, is a taxpayer separate from the consolidated group and this entity has experienced cumulative losses in recent years.
In 2021 and 2020, 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 2021 and 2020 of $5.0 million and $6.2 million, respectively. The decrease in the valuation allowance related to the U.K. NOL carryforward in 2021 as compared to 2020 was primarily due to current year activity.
In 2021 and 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 2021 and 2020 of $3.2 million and $1.9 million, respectively. The increase in the valuation allowance related to the U.S. state NOL carryforwards in 2021 as compared to 2020 was primarily due to current year activity.
Deferred tax assets and liabilities include SPCs the Company participates in at Inova Re, net of a valuation allowance of $0.6 million and $0.5 million at December 31, 2021 and 2020, respectively. Due to the limited operations of these SPCs as of December 31, 2021 and 2020, management concluded that a valuation allowance was required against the DTAs of certain SPCs. The nominal increase in the valuation allowance related to the SPCs at Inova Re is due to current year activity.
As a result of ProAssurance's acquisition of NORCAL, the Company recorded $46.8 million of net deferred tax assets at the acquisition date reflecting the remeasurement of NORCAL's historical net deferred tax assets. The Company evaluated the realizability of the deferred tax assets acquired from NORCAL during the Company's accounting for the acquisition and management concluded that it was more likely than not that the acquired deferred tax assets would be realized. Management’s assessment of the need for the aforementioned valuation allowances at December 31, 2021 included an analysis of the available sources of income, including projections of income for the consolidated group following the NORCAL acquisition.
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 $7.9 million at December 31, 2021 and $18.9 million at December 31, 2020, both carried as a part of other assets.
The statute of limitations is now closed for all tax years prior to 2018.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for 2021, 2020 and 2019, were as follows:
(In thousands)202120202019
Balance at January 1$5,199 $5,070 $3,601 
Increases for tax positions taken during the current year— — 1,749 
Decreases for tax positions taken during the current year(1,630)(4,853)— 
Increases for tax positions taken during prior years— 5,342 — 
Decreases relating to a lapse of the applicable statute of limitations(549)(360)(280)
Balance at December 31$3,020 $5,199 $5,070 
At December 31, 2021 and 2020, approximately $0.3 million and $0.8 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, 2021 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 were nominal for each of the years ended December 31, 2021, 2020 and 2019. The accrued liability for interest was approximately $0.4 million and $0.5 million at December 31, 2021 and 2020, respectively.
Income tax expense (benefit) for each of the years ended December 31, 2021, 2020 and 2019 consisted of the following:
(In thousands)202120202019
Provision for income taxes:
Current expense (benefit)
Federal and foreign$885 $(19,885)$(2,147)
State279 (296)982 
Total current expense (benefit)1,164 (20,181)(1,165)
Deferred expense (benefit)
Federal and foreign1,290 (20,476)(27,404)
State29 (672)(1,239)
Total deferred expense (benefit)1,319 (21,148)(28,643)
Total income tax expense (benefit)$2,483 $(41,329)$(29,808)

A reconciliation of “expected” federal income tax expense (benefit) to actual income tax expense (benefit) for each of the years ended December 31, 2021, 2020 and 2019 were as follows:
(In thousands)202120202019
Computed “expected” tax expense (benefit)$30,787 $(45,582)$(6,049)
Tax-exempt income (1)
(1,298)(976)(1,528)
Tax credits(13,160)(17,876)(21,933)
Non-U.S. operating results(1,322)(1,307)(1,447)
Tax deficiency (excess tax benefit) on share-based compensation286 457 99 
Tax rate differential on loss carryback— (7,758)(3,400)
Goodwill impairment(2)
— 31,413 — 
Non-taxable gain on bargain purchase(3)
(15,626)— — 
Provision-to-return and other differences3,574 1,217 3,595 
Change in uncertain tax positions(1,909)(1,674)1,956 
State income taxes460 (561)(376)
Benefit from amended returns— — (550)
Other691 1,318 (175)
Total income tax expense (benefit)$2,483 $(41,329)$(29,808)
(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 in Note 8).
(3) Represents the tax impact of the non-taxable gain on bargain purchase as a result of the Company's acquisition of NORCAL on May 5, 2021. See further discussion on the gain on bargain purchase in Note 2.
The Company's pre-tax income in 2021 included a gain on bargain purchase of $74.4 million as a result of the Company's acquisition of NORCAL, all of which was non-taxable. See further discussion on the gain on bargain purchase in Note 2. 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 Note 8. 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").
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 eased 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. As a result of the CARES Act, ProAssurance was permitted to carryback NOLs generated in tax years 2019 and 2020 for up to five years. ProAssurance generated an NOL of approximately $33.3 million from the 2020 tax year that was carried back to the 2015 tax year which resulted in a claim for a refund of approximately $11.7 million. Additionally, ProAssurance had an NOL of approximately $25.6 million from the 2019 tax year that was carried back to the 2014 tax year and generated a tax refund of approximately $9.0 million which the Company 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.
American Rescue Plan Act of 2021
In response to economic concerns associated with COVID-19, the American Rescue Plan Act of 2021 was signed into law on March 11, 2021 and includes an expansion of the number of employees covered by the limitation on the deductibility of compensation in excess of $1 million. This provision is effective for tax years beginning after December 31, 2026. The Company has evaluated this provision as well as the other provisions of the American Rescue Plan Act of 2021 and concluded that they will not have a material impact on ProAssurance's financial position or results of operations as of December 31, 2021.