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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019 or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to                          
Commission file number 0-16533
ProAssurance Corporation
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
63-1261433
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer Identification No.)
 
 
100 Brookwood Place, Birmingham, AL
35209
(Address of Principal Executive Offices)
(Zip Code)
 
 
(205) 877-4400
 
(Registrant’s Telephone Number,
Including Area Code)
(Former Name, Former Address, and Former
Fiscal Year, if Changed Since Last Report)
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):
Large accelerated filer
 
ý
 
 
Accelerated filer
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
(Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

 
 
 
 
 
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 Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of April 25, 2019, there were 53,742,438 shares of the registrant’s common stock outstanding.


Table of Contents

Glossary of Terms and Acronyms

When the following terms and acronyms appear in the text of this report, they have the meanings indicated below.
Term
Meaning
AOCI
Accumulated other comprehensive income (loss)
ASU
Accounting Standards Update
BEAT
Base erosion anti-abuse tax
Board
Board of Directors of ProAssurance Corporation
BOLI
Business owned life insurance
Council of Lloyd's
The governing body for Lloyd's of London
CODM
Chief Operating Decision Maker
DDR
Death, disability and retirement
DPAC
Deferred policy acquisition costs
Eastern Re
Eastern Re, LTD, S.P.C.
EBUB
Earned but unbilled premium
FAL
Funds at Lloyd's
FASB
Financial Accounting Standards Board
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FNMA
Federal National Mortgage Association
GAAP
Generally accepted accounting principles in the United States of America
GILTI
Global intangible low-taxed income
GNMA
Government National Mortgage Association
HCPL
Healthcare professional liability
IBNR
Incurred but not reported
Inova Re
Inova Re, LTD, S.P.C.
IRS
Internal Revenue Service
LIBOR
London Interbank Offered Rate
LLC
Limited liability company
Lloyd's
Lloyd's of London market
LP
Limited partnership
LPT
Loss portfolio transfer
Medical technology liability
Medical technology and life sciences products liability
Mortgage Loans
Two ten-year mortgage loans collectively with an original borrowing amount of approximately $40 million, each entered into by a subsidiary of ProAssurance
NAIC
National Association of Insurance Commissioners
NAV
Net asset value
NOL
Net operating loss
NRSRO
Nationally recognized statistical rating organization
NYSE
New York Stock Exchange
OCI
Other comprehensive income (loss)
OTTI
Other-than-temporary impairment
PCAOB
Public Company Accounting Oversight Board
Revolving Credit Agreement
ProAssurance's $250 million revolving credit agreement
ROE
Return on equity
ROU
Right-of-use
SAP
Statutory accounting principles

2

Table of Contents

Term
Meaning
SEC
Securities and Exchange Commission
SPA
Special Purpose Arrangement
SPC
Segregated portfolio cell
Specialty P&C
Specialty Property and Casualty
Syndicate 1729
Lloyd's of London Syndicate 1729
Syndicate 6131
Lloyd's of London Syndicate 6131, a Special Purpose Arrangement with Lloyd's of London Syndicate 1729
Syndicate Credit Agreement
Unconditional revolving credit agreement with the Premium Trust Fund of Syndicate 1729
TCJA
Tax Cuts and Jobs Act H.R.1 of 2017
U.K.
United Kingdom of Great Britain and Northern Ireland
ULAE
Unallocated loss adjustment expense
VIE
Variable interest entity

3

Table of Contents

Caution Regarding Forward-Looking Statements
Any statements in this Form 10-Q 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-Q 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 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:
Ÿ
changes in general economic conditions, including the impact of inflation or deflation and unemployment;
Ÿ
our ability to maintain our dividend payments;
Ÿ
regulatory, legislative and judicial actions or decisions that could affect our business plans or operations, including the impact of Brexit;
Ÿ
the enactment or repeal of tort reforms;
Ÿ
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;
Ÿ
changes in the interest and tax rate environment;
Ÿ
resolution of uncertain tax matters and changes in tax laws, including the impact of the TCJA;
Ÿ
changes in laws or government regulations regarding financial markets or market activity that may affect our business;
Ÿ
changes in the ability of the U.S. government to meet its obligations that may affect the U.S. economy and our business;
Ÿ
performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;
Ÿ
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;
Ÿ
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;
Ÿ
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;
Ÿ
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;
Ÿ
uncertainties inherent in the estimate of our loss and loss adjustment expense reserve and reinsurance recoverable;
Ÿ
changes in the availability, cost, quality or collectability of insurance/reinsurance;
Ÿ
the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
Ÿ
effects on our claims costs from mass tort litigation that are different from that anticipated by us;
Ÿ
allegations of bad faith which may arise from our handling of any particular claim, including failure to settle;
Ÿ
loss or consolidation of independent agents, agencies, brokers or brokerage firms;
Ÿ
changes in our organization, compensation and benefit plans;

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Table of Contents

Ÿ
changes in the business or competitive environment may limit the effectiveness of our business strategy and impact our revenues;
Ÿ
our ability to retain and recruit senior management;
Ÿ
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;
Ÿ
the impact of a catastrophic event, as it relates to both our operations and our insured risks;
Ÿ
the impact of acts of terrorism and acts of war;
Ÿ
the effects of terrorism-related insurance legislation and laws;
Ÿ
guaranty funds and other state assessments;
Ÿ
our ability to achieve continued growth through expansion into new markets or through acquisitions or business combinations;
Ÿ
changes to the ratings assigned by rating agencies to our insurance subsidiaries, individually or as a group;
Ÿ
provisions in our charter documents, Delaware law and state insurance laws may impede attempts to replace or remove management or may impede a takeover;
Ÿ
state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment securities, from being used for general corporate purposes;
Ÿ
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
Ÿ
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 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:
Ÿ
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;
Ÿ
Syndicate operating results can be affected by decisions made by the Council of Lloyd's which the management of Syndicate 1729 and Syndicate 6131 have little ability to control, such as a decision to not approve the business plan of Syndicate 1729 or Syndicate 6131, or a decision to increase the capital required to continue operations, and by our obligation to pay levies to Lloyd's;
Ÿ
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;
Ÿ
rating agencies could downgrade their ratings of Lloyd's as a whole; and
Ÿ
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 our Form 10-K and other documents we file with the SEC, such as our current reports on Form 8-K and our regular 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.

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TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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ProAssurance Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Investments
 
 
 
Fixed maturities, available for sale, at fair value; amortized cost, $2,175,109 and $2,116,825, respectively
$
2,185,798

 
$
2,093,798

Fixed maturities, trading, at fair value; cost, $43,031 and $38,445, respectively
42,973

 
38,188

Equity investments, at fair value; cost, $451,925 and $450,931, respectively
476,324

 
442,937

Short-term investments
217,788

 
308,319

Business owned life insurance
64,549

 
64,096

Investment in unconsolidated subsidiaries
390,854

 
367,757

Other investments, $33,441 and $31,344 at fair value, respectively, otherwise at cost or amortized cost
36,328

 
34,287

Total Investments
3,414,614

 
3,349,382

Cash and cash equivalents
71,830

 
80,471

Premiums receivable
289,126

 
261,466

Receivable from reinsurers on paid losses and loss adjustment expenses
27,956

 
11,558

Receivable from reinsurers on unpaid losses and loss adjustment expenses
349,319

 
343,820

Prepaid reinsurance premiums
45,095

 
40,631

Deferred policy acquisition costs
56,923

 
54,116

Deferred tax asset, net
15,685

 
29,108

Real estate, net
30,688

 
31,114

Operating lease ROU assets
17,227

 

Intangible assets, net
75,267

 
76,776

Goodwill
210,725

 
210,725

Other assets
112,653

 
111,559

Total Assets
$
4,717,108

 
$
4,600,726

Liabilities and Shareholders' Equity
 
 
 
Liabilities
 
 
 
Policy liabilities and accruals
 
 
 
Reserve for losses and loss adjustment expenses
$
2,158,995

 
$
2,119,847

Unearned premiums
457,607

 
415,211

Reinsurance premiums payable
54,692

 
55,614

Total Policy Liabilities
2,671,294

 
2,590,672

Operating lease liabilities
18,036

 

Other liabilities
178,395

 
199,295

Debt less debt issuance costs
287,487

 
287,757

Total Liabilities
3,155,212

 
3,077,724

Shareholders' Equity
 
 
 
Common shares, par value $0.01 per share, 100,000,000 shares authorized, 63,093,580 and 62,989,421 shares issued, respectively
631

 
630

Additional paid-in capital
383,494

 
384,713

Accumulated other comprehensive income (loss), net of deferred tax expense (benefit) of $2,449 and ($4,355), respectively
8,655

 
(16,911
)
Retained earnings
1,586,393

 
1,571,847

Treasury shares, at cost, 9,352,373 shares as of each respective period end
(417,277
)
 
(417,277
)
Total Shareholders' Equity
1,561,896

 
1,523,002

Total Liabilities and Shareholders' Equity
$
4,717,108

 
$
4,600,726

See accompanying notes.

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Table of Contents

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Capital (Unaudited)
(In thousands)
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total
Balance at December 31, 2018
 
$
630

 
$
384,713

 
$
(16,911
)
 
$
1,571,847

 
$
(417,277
)
 
$
1,523,002

Cumulative-effect adjustment-
ASU 2018-07 adoption*
 

 

 

 
(444
)
 

 
(444
)
Common shares issued for compensation and effect of shares reissued to stock purchase plan
 

 
176

 

 

 

 
176

Share-based compensation
 

 
1,237

 

 

 

 
1,237

Net effect of restricted and performance shares issued
 
1

 
(2,632
)
 

 

 

 
(2,631
)
Dividends to shareholders
 

 

 

 
(16,660
)
 

 
(16,660
)
Other comprehensive income (loss)
 

 

 
25,566

 

 

 
25,566

Net income
 

 

 

 
31,650

 

 
31,650

Balance at March 31, 2019
 
$
631


$
383,494


$
8,655


$
1,586,393


$
(417,277
)

$
1,561,896

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings
 
Treasury Stock
 
Total
Balance at December 31, 2017
 
$
628

 
$
383,077

 
$
14,911

 
$
1,614,186

 
$
(418,007
)
 
$
1,594,795

Cumulative-effect adjustment-
ASU 2016-01 adoption
 

 

 

 
8,334

 

 
8,334

Cumulative-effect adjustment-
ASU 2018-02 adoption
 

 

 
3,416

 
(3,416
)
 

 

Common shares issued for compensation and effect of shares reissued to stock purchase plan
 

 
122

 

 

 
(2
)
 
120

Share-based compensation
 

 
902

 

 

 

 
902

Net effect of restricted and performance shares issued
 
2

 
(3,851
)
 

 

 

 
(3,849
)
Dividends to shareholders
 

 

 

 
(16,616
)
 

 
(16,616
)
Other comprehensive income (loss)
 

 

 
(26,373
)
 

 

 
(26,373
)
Net income
 

 

 

 
11,856

 

 
11,856

Balance at March 31, 2018

$
630


$
380,250


$
(8,046
)

$
1,614,344


$
(418,009
)

$
1,569,169

* See Note 1 for discussion of accounting guidance adopted during the period.
See accompanying notes.

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Table of Contents

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)
(In thousands, except per share data)
 
Three Months Ended March 31
 
2019
 
2018
Revenues
 
 
 
Net premiums earned
$
208,149

 
$
187,159

Net investment income
22,818

 
22,027

Equity in earnings (loss) of unconsolidated subsidiaries
(810
)
 
1,640

Net realized investment gains (losses):
 
 
 
OTTI losses
(136
)
 

Portion of OTTI losses recognized in other comprehensive income before taxes
87

 

Net impairment losses recognized in earnings
(49
)
 

Other net realized investment gains (losses)
36,672

 
(12,517
)
Total net realized investment gains (losses)
36,623

 
(12,517
)
Other income
2,095

 
2,723

Total revenues
268,875

 
201,032

Expenses
 
 
 
Net losses and loss adjustment expenses
159,755

 
129,786

Underwriting, policy acquisition and operating expenses
 
 
 
Operating expense
33,290

 
32,467

DPAC amortization
28,102

 
24,893

Segregated portfolio cells dividend expense (income)
4,787

 
1,747

Interest expense
4,330

 
3,705

Total expenses
230,264

 
192,598

Income before income taxes
38,611

 
8,434

Provision for income taxes
 
 
 
Current expense (benefit)
343

 
(1,328
)
Deferred expense (benefit)
6,618

 
(2,094
)
Total income tax expense (benefit)
6,961

 
(3,422
)
Net income
31,650

 
11,856

Other comprehensive income (loss), after tax, net of reclassification adjustments
25,566

 
(26,373
)
Comprehensive income (loss)
$
57,216

 
$
(14,517
)
Earnings per share
 
 
 
Basic
$
0.59

 
$
0.22

Diluted
$
0.59

 
$
0.22

Weighted average number of common shares outstanding:
 
 
 
Basic
53,683

 
53,515

Diluted
53,808

 
53,682

Cash dividends declared per common share
$
0.31

 
$
0.31

See accompanying notes.

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Table of Contents

ProAssurance Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
Three Months Ended March 31
 
2019
 
2018
Operating Activities
 
 
 
Net income
$
31,650

 
$
11,856

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization, net of accretion
5,036

 
6,079

(Increase) decrease in cash surrender value of BOLI
(453
)
 
(449
)
Net realized investment (gains) losses
(36,623
)
 
12,517

Share-based compensation
1,228

 
902

Deferred income tax expense (benefit)
6,618

 
(2,094
)
Policy acquisition costs, net of amortization (net deferral)
(2,807
)
 
(504
)
Equity in (earnings) loss of unconsolidated subsidiaries
810

 
(1,640
)
Distributed earnings from unconsolidated subsidiaries
1,938

 
7,018

Other
1,337

 
752

Other changes in assets and liabilities:
 
 
 
Premiums receivable
(27,660
)
 
(9,559
)
Reinsurance related assets and liabilities
(27,283
)
 
9,651

Other assets
(1,447
)
 
6,254

Reserve for losses and loss adjustment expenses
39,148

 
8,420

Unearned premiums
42,396

 
27,743

Other liabilities
504

 
(3,592
)
Net cash provided (used) by operating activities
34,392

 
73,354

Investing Activities
 
 
 
Purchases of:
 
 
 
Fixed maturities, available for sale
(179,107
)
 
(367,872
)
Fixed maturities, trading
(4,614
)
 
(4,162
)
Equity investments
(25,016
)
 
(67,129
)
Other investments
(4,602
)
 
(7,108
)
Funding of qualified affordable housing project tax credit partnerships
(247
)
 

Investment in unconsolidated subsidiaries
(31,150
)
 
(21,985
)
Proceeds from sales or maturities of:
 
 
 
Fixed maturities, available for sale
119,425

 
459,822

Equity investments
25,812

 
51,085

Other investments
4,738

 
6,092

Return of invested capital from unconsolidated subsidiaries
5,305

 
11,783

Net sales or maturities (purchases) of short-term investments
90,698

 
82,976

Unsettled security transactions, net change
5,440

 
22,421

Purchases of capital assets
(2,572
)
 
(1,836
)
Repayments (advances) under Syndicate Credit Agreement
(212
)
 
(17,980
)
Other
(30
)
 

Net cash provided (used) by investing activities
3,868

 
146,107

Continued on the following page.
 
 
 


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Table of Contents

 
Three Months Ended March 31
 
2019
 
2018
Continued from the previous page.
 
 
 
Financing Activities
 
 
 
Borrowings (repayments) under Revolving Credit Agreement

 
(40,000
)
Repayments of Mortgage Loans
(362
)
 
(349
)
Dividends to shareholders
(43,338
)
 
(266,734
)
Capital contribution received from (return of capital to) external segregated portfolio cell participants
(562
)
 
251

Other
(2,639
)
 
(3,877
)
Net cash provided (used) by financing activities
(46,901
)
 
(310,709
)
Increase (decrease) in cash and cash equivalents
(8,641
)
 
(91,248
)
Cash and cash equivalents at beginning of period
80,471

 
134,495

Cash and cash equivalents at end of period
$
71,830

 
$
43,247

Significant Non-Cash Transactions
 
 
 
Dividends declared and not yet paid
$
16,660

 
$
16,616


See accompanying notes.

11

Table of Contents
ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019


1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation and its consolidated subsidiaries (ProAssurance, PRA or the Company). 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 three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2018 report on Form 10-K. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to March 31, 2019 for recognition or disclosure in its financial statements and notes to financial statements.
Beginning in the third quarter of 2018, 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 13.
Reclassifications
As a result of the third quarter of 2018 segment reorganization, prior period segment information in Note 13 has been recast to conform to the Company's current segment reporting (see Note 13 for further information).
Certain other insignificant prior period amounts have been reclassified to conform to the current period presentation.
Accounting Policies
Except as added 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, 2018 report on Form 10-K.
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 Condensed Consolidated Balance Sheet as of March 31, 2019. The ROU asset represents the right to use the underlying asset (office space) for the lease term. As of March 31, 2019, ProAssurance has no leases that are classified as financing leases.
Operating 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. As the majority of ProAssurance's lessors do not provide an implicit discount rate, the Company uses its collateralized incremental borrowing rate in determining the present value of remaining lease payments. Due to the adoption of ASU 2016-02 (see further discussion that follows), the Company used its collateralized incremental borrowing rate as of January 1, 2019 for operating leases that commenced prior to that date. Leases with an initial term of twelve months or less are considered short-term and are not recorded on the Condensed Consolidated Balance Sheet; lease expense for these leases is recognized on a straight-line basis over the lease term. Additionally, for leases entered into or reassessed after the adoption of ASU 2016-02, ProAssurance accounts for lease and non-lease components of a contract as a single lease component. Operating lease expense is included as a component of operating expense on the Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2019 and 2018.
Operating lease ROU assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount of a ROU asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the underlying leased asset over the remaining lease term. That assessment is based on the carrying amount of the ROU asset 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 ROU asset exceeds its fair value.

12

Table of Contents
ProAssurance Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019

Other Liabilities
Other liabilities consisted of the following:
(In thousands)
 
March 31, 2019
 
December 31, 2018
SPC dividends payable
 
$
59,129

 
$
53,604

Unpaid dividends
 
16,660

 
43,446

All other
 
102,606

 
102,245

Total other liabilities
 
$
178,395

 
$
199,295


SPC dividends payable are the cumulative undistributed earnings contractually payable to the external cell participants of SPCs operated by ProAssurance's Cayman Islands subsidiaries, Eastern Re and Inova Re.
Unpaid dividends represent common stock dividends declared by ProAssurance's Board that had not yet been paid as of March 31, 2019. Unpaid dividends at December 31, 2018 included a special dividend declared in the fourth quarter of 2018 that was paid in January 2019.
Accounting Changes Adopted
Leases (ASU 2016-02)
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance that requires a lessee to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ProAssurance adopted the guidance as of January 1, 2019 using a modified retrospective application and elected the transition option provided that allows companies to continue to apply legacy GAAP in comparative periods. Also, ProAssurance elected the package of practical expedients permitted under the guidance, which allowed the Company to carryforward its historical lease classification, its assessment on whether a contract is or contains a lease and its initial direct costs for any leases that exist prior to adoption of the new standard. Furthermore, ProAssurance elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the Condensed Consolidated Balance Sheet and recognize the associated lease payments in the Condensed Consolidated Statements of Income and Comprehensive Income on a straight-line basis over the lease term. ProAssurance recognized a total ROU asset and total lease liabilities of approximately $19 million on the Condensed Consolidated Balance Sheet as of January 1, 2019 which relate to ProAssurance's real estate operating leases; the Company does not consider these leases to be material to its financial position. Adoption of this guidance had no material impact on ProAssurance's results of operation or cash flows.
ProAssurance's Revolving Credit Agreement contains a financial covenant regarding permitted leverage ratios based upon Consolidated Funded Indebtedness to Consolidated Total Capitalization; however, adoption of this guidance had no material impact on this covenant. ProAssurance’s Mortgage Loans also contain a financial covenant regarding permitted leverage ratios, principally based upon SAP Consolidated Net Worth; however, as the NAIC did not adopt the principles found in ASU 2016-02, adoption of the guidance had no impact on this covenant.
Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance that will require the premium for certain callable debt securities to be amortized over a shorter period than is currently required. Currently amortization is permitted over the contractual life of the instrument and the guidance shortens the amortization to the earliest call date. The purpose of the guidance is to more closely align the amortization period of premiums to expectations incorporated in market pricing on the underlying securities. ProAssurance adopted the guidance as of January 1, 2019. As ProAssurance amortizes premium on callable debt securities to the earliest call date, adoption of the guidance had no material effect on ProAssurance’s results of operations, financial position or cash flows.
Derivatives and Hedging (ASU 2017-12)
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance to improve financial reporting of hedging relationships to better portray the entity's risk management activities in the consolidated financial statements. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. ProAssurance adopted the guidance as of January 1, 2019. ProAssurance's derivative

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Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019

instrument at March 31, 2019 is not designated as a hedging instrument; therefore, adoption had no material effect on ProAssurance's results of operations, financial position or cash flows.
Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07)
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB issued guidance which reduces the complexity in accounting for nonemployee share-based payment awards. The new guidance substantially aligns the accounting for nonemployee share-based payment awards with the accounting guidance for employee share-based payment awards with certain exceptions, including the inputs used in estimating the fair value of the nonemployee awards and the period of time and pattern of expense recognition. ProAssurance adopted the guidance as of January 1, 2019 using a modified retrospective application and recorded a cumulative-effect adjustment of approximately $0.4 million to beginning retained earnings in the Condensed Consolidated Statement of Changes in Capital for the three months ended March 31, 2019. Adoption had no material effect of ProAssurance's results of operations or cash flows.
Derivatives and Hedging - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16)
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, the FASB
issued new guidance that permits the use of the Overnight Index Swap Rate based on the Secured Financing Rate as a U.S.
benchmark interest rate for hedge accounting purposes. ProAssurance adopted the guidance as of January 1, 2019.
As of March 31, 2019, ProAssurance's derivative instrument is not designated as a hedging instrument; therefore, adoption had no material effect on ProAssurance's results of operations, financial position or cash flows.
Accounting Changes Not Yet Adopted
Improvements to Financial Instruments - Credit Losses (ASU 2016-13)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB issued guidance that replaces the incurred loss impairment methodology, which delays recognition of credit losses until a probable loss has been incurred, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Under the new guidance, credit losses are required to be recorded through an allowance for credit losses account and the income statement reflects the measurement for newly recognized financial assets, as well as increases or decreases of expected credit losses that have taken place during the period. Credit losses on available-for-sale fixed maturity securities will be required to be presented as an allowance, rather than as a write-down of the asset, limited to the amount by which the fair value is below amortized cost. Adoption of this guidance is not expected to have a material impact on ProAssurance's available-for-sale fixed maturity portfolio. In addition, ProAssurance's premiums receivable and receivables from reinsurers are also included in the scope of this new guidance; however, ProAssurance has not historically experienced material credit losses due to the financial condition of an insurer or reinsurer. ProAssurance plans to adopt the guidance beginning January 1, 2020 and is in the process of evaluating the effect the new guidance would have on its results of operations and financial position.
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. In addition, the guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. ProAssurance plans to adopt the guidance beginning January 1, 2020. Adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB issued guidance that eliminates, modifies and adds certain disclosure requirements related to fair value measurements. The new guidance eliminates the requirements to disclose the transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels of the fair value hierarchy and the valuation process for Level 3 fair value measurements while it modifies existing disclosure requirements related to measurement uncertainty and the requirement to disclose the timing of liquidation of an investee's assets for investments in certain entities that calculate NAV. The new guidance also adds requirements to disclose changes in unrealized gains and losses included in OCI for recurring Level 3 fair value measurements as well as the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. An entity is permitted to early adopt any eliminated or modified disclosure requirements and delay adoption of

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Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019

the additional disclosure requirements until the guidance is effective. During the third quarter of 2018, ProAssurance elected to early adopt the provisions that eliminate and modify certain disclosure requirements within Note 2 on a retrospective basis and adoption of these certain provisions had no material effect on ProAssurance’s results of operations, financial position or cash flows as it affected disclosures only. ProAssurance plans to adopt the additional disclosure requirements beginning January 1, 2020 and adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.
Intangibles - Goodwill and Other-Internal-Use Software (ASU 2018-15)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB amended the new standard regarding accounting for implementation costs in cloud computing arrangements. The amended guidance substantially aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ProAssurance plans to adopt the guidance beginning January 1, 2020. Adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.
Targeted Improvements to Related Party Guidance for VIEs (ASU 2018-17)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB amended guidance which improves the consistency of the application of the VIE guidance for common control arrangements. The amended guidance requires an entity to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety when determining whether a decision-making fee is a variable interest. ProAssurance plans to adopt the guidance beginning January 1, 2020. As of March 31, 2019 ProAssurance does not have any material indirect interests held through related parties under common control; therefore, adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.
Collaborative Arrangements (ASU 2018-18)
Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, the FASB issued new guidance which clarifies how to assess whether certain transactions between participants in a collaborative arrangement should be accounted for under the revenue from contracts with customers accounting standard when the counterpart is a customer. In addition, the guidance precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer for that transaction. ProAssurance plans to adopt the guidance beginning January 1, 2020 and adoption is not expected to have a material effect on ProAssurance’s results of operations, financial position or cash flows.


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Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019

2. Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:
 
Level 1:
quoted (unadjusted) market prices in active markets for identical assets and liabilities. For ProAssurance, Level 1 inputs are generally quotes for debt or equity securities actively traded in exchange or over-the-counter markets.
 
Level 2:
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.
 
Level 3:
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 March 31, 2019 and December 31, 2018 are shown in the following tables. Where applicable, the tables also indicate the fair value hierarchy of the valuation techniques utilized to determine those fair values. For some assets, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When this is the case, the asset is categorized based on the level of the most significant input to the fair value measurement. Assessments of the significance of a particular input to the fair value measurement require judgment and consideration of factors specific to the assets being valued.

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Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019

 
March 31, 2019
 
Fair Value Measurements Using
 
Total
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, available for sale
 
 
 
 
 
 
 
U.S. Treasury obligations
$

 
$
119,590

 
$

 
$
119,590

U.S. Government-sponsored enterprise obligations

 
28,802

 

 
28,802

State and municipal bonds

 
297,812

 

 
297,812

Corporate debt, multiple observable inputs

 
1,256,519

 

 
1,256,519

Corporate debt, limited observable inputs

 

 
4,296

 
4,296

Residential mortgage-backed securities

 
189,513

 

 
189,513

Agency commercial mortgage-backed securities

 
11,541

 

 
11,541

Other commercial mortgage-backed securities

 
49,620

 
1,182

 
50,802

Other asset-backed securities

 
223,973

 
2,950

 
226,923

Fixed maturities, trading

 
42,973

 

 
42,973

Equity investments
 
 
 
 
 
 

Financial
73,849

 

 

 
73,849

Utilities/Energy
57,712

 

 

 
57,712

Consumer oriented
53,592

 

 

 
53,592

Industrial
48,334

 

 

 
48,334

Bond funds
178,309

 

 

 
178,309

All other
43,813

 

 

 
43,813

Short-term investments
180,058

 
37,730

 

 
217,788

Other investments

 
33,438

 
3

 
33,441

Other assets

 
1,447

 

 
1,447

Total assets categorized within the fair value hierarchy
$
635,667

 
$
2,292,958

 
$
8,431

 
2,937,056

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
 
 
 
 
 
 
20,715

Investment in unconsolidated subsidiaries
 
 
 
 
 
 
291,525

Total assets at fair value
 
 
 
 
 
 
$
3,249,296


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Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2019

 
December 31, 2018
 
Fair Value Measurements Using
 
Total
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, available for sale
 
 
 
 
 
 
 
U.S. Treasury obligations
$

 
$
120,201

 
$

 
$
120,201

U.S. Government-sponsored enterprise obligations

 
35,354

 

 
35,354

State and municipal bonds

 
293,772

 

 
293,772

Corporate debt, multiple observable inputs
2,319

 
1,216,834

 

 
1,219,153

Corporate debt, limited observable inputs

 

 
4,322

 
4,322

Residential mortgage-backed securities

 
181,238

 

 
181,238

Agency commercial mortgage-backed securities

 
13,108