Reserve for Losses and Loss Adjustment Expenses

3 Months Ended

Mar. 31, 2023

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. For additional information regarding ProAssurance's reserve for losses, see Note 1 and Note 8 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2022 report on Form 10-K.

Activity in the reserve for losses and loss adjustment expenses is summarized as follows:


(In thousands)	Three Months Ended March 31, 2023		Three Months Ended March 31, 2022		Year Ended December 31, 2022
Balance, beginning of year	$	3,471,147	$	3,579,940	$	3,579,940
Less reinsurance recoverables on unpaid losses and loss adjustment expenses	431,889		451,741		451,741
Net balance, beginning of year	3,039,258		3,128,199		3,128,199

Net losses:
Current year(1)	198,240		214,753		813,515
(Favorable) unfavorable development of reserves established in prior years, net(2)	7,056		(5,330)		(36,753)
Total	205,296		209,423		776,762
Paid related to:
Current year	(11,052)		(13,179)		(108,139)
Prior years	(211,916)		(185,977)		(757,564)
Total paid	(222,968)		(199,156)		(865,703)
Net balance, end of period	3,021,586		3,138,466		3,039,258
Plus reinsurance recoverables on unpaid losses and loss adjustment expenses	447,693		464,780		431,889
Balance, end of period	$	3,469,279	$	3,603,246	$	3,471,147

(1) Current year net losses for the three months ended March 31, 2022 and year ended December 31, 2022 included $2.5 million and $4.9 million, respectively, of purchase accounting amortization of the negative VOBA associated with NORCAL's assumed unearned premium, which was amortized over a period in proportion to the earn-out of the associated premium as a reduction to current accident year net losses (see Note 2 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2022 report on Form 10-K). As of June 30, 2022, the negative VOBA was fully amortized.

(2) Net prior year reserve development recognized for the three months ended March 31, 2023 and 2022 as well as the year ended December 31, 2022 included $2.5 million, $2.9 million and $10.8 million, respectively, of amortization of the purchase accounting fair value adjustment on NORCAL's assumed net reserve and amortization of the negative VOBA associated with NORCAL's DDR reserve which is recorded as a reduction to prior accident year net losses and loss adjustment expenses (see Note 2 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2022 report on Form 10-K).

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 consolidated net unfavorable prior year reserve development recognized in the three months ended March 31, 2023 primarily reflected the continued challenging loss environment in Specialty P&C segment, as claim costs are pressured by social inflation and higher than anticipated loss severity trends which started to emerge in the fourth quarter of 2022. During the first quarter of 2023, the Company strengthened case reserves in its Specialty P&C segment related to four large claims resulting in net unfavorable prior year reserve development of $10.1 million recognized during the three months ended March 31, 2023, $7.5 million of which related to NORCAL's accident years 2016 and 2020. The consolidated net unfavorable loss development also reflected unfavorable development recognized in the Workers' Compensation Insurance segment primarily attributable to one large claim from the 1997 accident year. Consolidated net unfavorable loss development recognized in the three months ended March 31, 2023 was partially offset by favorable reserve development recognized in the Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments. The favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment reflected overall favorable trends in claim closing patterns primarily in accident years 2016 through 2020. The favorable reserve development recognized in the Lloyd's Syndicates segment was driven by lower than expected loss development on certain large items, primarily catastrophe related losses.

The net favorable loss development recognized in the three months ended March 31, 2022 primarily reflected overall favorable trends in claim closing patterns in the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments. The net favorable loss development recognized in the Workers' Compensation Insurance segment is primarily related to the 2019 accident year and prior. The net favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment is primarily related to the 2019 and 2020 accident years. Net favorable development recognized during the three months ended March 31, 2022 was net of an increase to the Company's reserve for potential ECO/XPL claims of $4.0 million in the Specialty P&C segment. Excluding the increase in the ECO/XPL reserve and amortization of purchase accounting adjustments (see footnote 2 in the table above), ProAssurance recognized net favorable prior accident year reserve development of $5.0 million in the Specialty P&C segment, principally related to accident years 2019 through 2021. Consolidated net favorable loss development recognized in the three months ended March 31, 2022 was partially offset by unfavorable reserve development recognized in the Lloyd's Syndicates segment driven by certain catastrophe related losses. As of March 31, 2022, ProAssurance did not recognize any development related to NORCAL's accident years 2020 or prior since the date of acquisition on May 5, 2021.

The net favorable loss development recognized for the year ended December 31, 2022 primarily reflected a lower than anticipated loss emergence in the Specialty P&C segment related to the 2017, 2020 and 2021 accident years, primarily attributable to NORCAL's 2021 accident year, and, to a lesser extent, the Medical Technology Liability line of business. The net favorable development recognized in the Specialty P&C segment also included a $9.0 million reduction in the Company's prior accident year IBNR reserve for COVID-19 as early first notices of potential claims related to anticipated COVID losses have not turned into claims. Further, the net favorable development recognized in the Specialty P&C segment was partially offset by higher than anticipated loss severity trends in select jurisdictions in the HCPL line of business, which emerged primarily in the fourth quarter of 2022. As of December 31, 2022, ProAssurance did not recognize any development related to NORCAL's accident years 2020 or prior since the date of acquisition on May 5, 2021. The net favorable development also reflected overall favorable trends in claim closing patterns in the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments. The net favorable loss development recognized in the Workers' Compensation Insurance segment is primarily related to the 2017 through 2020 accident years. The net favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment is primarily related to the 2016 through 2021 accident years. Consolidated net favorable loss development recognized in 2022 was partially offset by unfavorable reserve development recognized in the Lloyd's Syndicates segment driven by higher than expected loss development on certain large claims, primarily catastrophe related losses.