PROASSURANCE CORP [PRA] Filings

10-Q 1 pra-20230930.htm 10-Q pra-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023 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)

(I.R.S. Employer Identification No.)

100 Brookwood Place,

Birmingham,

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)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	PRA	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

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 ☒

As of November 3, 2023, there were 50,969,343 shares of the registrant’s common stock outstanding.

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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
AAD			Annual aggregate deductible

AOCI			Accumulated other comprehensive income (loss)


Board			Board of Directors of ProAssurance Corporation
BOLI			Business owned life insurance
CARES Act			Coronavirus Aid, Relief and Economic Security Act

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
ECO/XPL			Extra-contractual obligations/excess of policy limit claims
ERC			Employee Retention Credit

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
FSMA			Financial Services and Markets Act
GAAP			Generally accepted accounting principles in the United States of America

GNMA			Government National Mortgage Association
HCPL			Healthcare professional liability
IBNR			Incurred but not reported
Inova Re			Inova Re, LTD, S.P.C.
Interest Rate Swaps			ProAssurance's two forward-starting interest rate swap agreements associated with its Revolving Credit Agreement and Term Loan
IRS			Internal Revenue Service

LIBOR			London Interbank Offered Rate
LLC			Limited liability company
Lloyd's			Lloyd's of London market
LP			Limited partnership

Medical Technology Liability			Medical technology and life sciences products liability



NAV			Net asset value

NOL			Net operating loss

NORCAL			NORCAL Insurance Company, formerly known as NORCAL Mutual Insurance Company
NRSRO			Nationally recognized statistical rating organization
NYSE			New York Stock Exchange
OCI			Other comprehensive income (loss)


PCAOB			Public Company Accounting Oversight Board


PPM RRG			Preferred Physicians Medical Risk Retention Group, a Mutual Insurance Company


Revolving Credit Agreement			ProAssurance's $250 million revolving credit agreement
ROE			Return on equity
ROU			Right-of-use


SEC			Securities and Exchange Commission


SOFR			Secured Overnight Financing Rate
SPC			Segregated portfolio cell

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Term			Meaning
Specialty P&C			Specialty Property and Casualty
Syndicate 1729			Lloyd's of London Syndicate 1729
Syndicate 6131			Lloyd's of London Syndicate 6131 was 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
Term Loan			ProAssurance's $125 million delayed draw term loan
U.K.			United Kingdom of Great Britain and Northern Ireland
ULAE			Unallocated loss adjustment expenses
VIE			Variable interest entity
VOBA			Value of business acquired

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Caution Regarding Forward-Looking Statements

Any statements in this Form 10-Q that are not historical facts or explicitly stated as an opinion 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 pricing or availability of acceptable reinsurance, actions by regulators and rating agencies, court actions, legislative actions, payment or performance of obligations under indebtedness, payment of dividends and other matters.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following factors that could affect the actual outcome of future events:


l			changes in general economic conditions, including the impact of inflation or deflation and unemployment;

l			regulatory, legislative and judicial actions or decisions that could affect our business plans or operations;
l			the enactment or repeal of tort reforms;
l			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;
l			changes in the interest and tax rate environment;
l			resolution of uncertain tax matters and changes in tax laws;
l			changes in laws or government regulations regarding financial markets or market activity that may affect our business;
l			changes in the ability, or perception thereof, of the U.S. government to meet its obligations that may affect the U.S. economy and our business;
l			performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;
l			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;
l			changes in laws or government regulations affecting the financial services industry, the property and casualty insurance industry or particular insurance lines underwritten by our subsidiaries or by Syndicate 1729;
l			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;
l			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;
l			the effect of cyclical insurance industry trends on our underwriting, including demand and pricing in the insurance and reinsurance markets in which we operate;
l			uncertainties inherent in the estimate of our loss and loss adjustment expense reserve and reinsurance recoverable;
l			changes in the availability, cost, quality or collectability of insurance/reinsurance;
l			the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
l			effects on our claims costs from mass tort litigation that are different from that anticipated by us;
l			allegations of bad faith which may arise from our handling of any particular claim, including failure to settle;
l			loss or consolidation of independent agents, agencies, brokers or brokerage firms;
l			changes in our organization, compensation and benefit plans;
l			changes in the business or competitive environment may limit the effectiveness of our business strategy and impact our revenues;

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l			our ability to retain and recruit senior management and other qualified personnel;
l			the availability, integrity and security of our technology infrastructure and that of our third-party providers, including any susceptibility to cyber-attacks which might result in a loss of information, operating capability or actual monetary loss;
l			the impact of a catastrophe, natural or man-made, including a pandemic event, as it relates to our business and insurance operations, investment results and our insured risks;


l			the effects of terrorism-related insurance legislation and laws;
l			guaranty funds and other state assessments;
l			our ability to achieve growth through expansion into new markets or through acquisitions or business combinations;

l			changes to the ratings assigned by rating agencies to our holding company or insurance subsidiaries, individually or as a group;
l			provisions in our charter documents, Delaware law and state insurance laws may impede attempts to replace or remove management or may impede a takeover;
l			state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment securities, from being used for general corporate purposes; and
l			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.
l			expected benefits from completed acquisitions may not be achieved or may be delayed longer than expected due to business disruption; loss of customers, employees or key agents; increased operating costs or inability to achieve cost savings and synergies; and assumption of greater than expected liabilities, among other reasons.

Our results may differ materially from those we expect and discuss in any forward-looking statements. The principal risk factors that may cause these material differences are described in "Item 1A, Risk Factors" in our December 31, 2022 report on Form 10-K and other documents we file with the SEC, such as our quarterly reports on Form 10-Q.

We caution readers not to place undue reliance on any such forward-looking statements, which are based upon conditions existing only as of the date made, and advise readers that these factors could affect our financial performance and could cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. Except as required by law or regulations, we do not undertake and specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

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	TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

	CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - SEPTEMBER 30, 2023 AND DECEMBER 31, 2022	7

	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (UNAUDITED) - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022	8

	CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022	10

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022	11

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	13

	BASIS OF PRESENTATION	13

	FAIR VALUE MEASUREMENT	15
	INVESTMENTS	24

	INCOME TAXES	31
	GOODWILL	32
	RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES	34
	COMMITMENTS AND CONTINGENCIES	36

	DEBT	37
	DERIVATIVES	38
	SHAREHOLDERS' EQUITY	39
	VARIABLE INTEREST ENTITIES	40
	EARNINGS (LOSS) PER SHARE	41
	SEGMENT INFORMATION	42
	BENEFIT PLANS	47


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	48

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	104

ITEM 4.	CONTROLS AND PROCEDURES	107

PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	107
ITEM 1A.	RISK FACTORS	107
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	107
ITEM 5.	OTHER INFORMATION	107
ITEM 6.	EXHIBITS	108
SIGNATURE		109

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)


	September 30, 2023		December 31, 2022
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost, $3,742,234 and $3,852,411, respectively; allowance for expected credit losses, $560 as of September 30, 2023 and $427 as of December 31, 2022)	$	3,355,312	$	3,472,472
Fixed maturities, trading, at fair value (cost, $46,081 and $45,048, respectively)	45,999		43,434
Equity investments, at fair value (cost, $164,574 and $162,429, respectively)	143,920		143,738
Short-term investments	247,394		245,313
Business owned life insurance	77,502		81,746
Investment in unconsolidated subsidiaries	297,314		305,210
Other investments (at fair value, $59,612 and $92,447, respectively, otherwise at cost or amortized cost)	62,816		95,770
Total Investments	4,230,257		4,387,683
Cash and cash equivalents	62,110		29,959



Premiums receivable (allowance for expected credit losses, $7,921 as of September 30, 2023 and $7,658 as of December 31, 2022)	279,131		246,094
Receivable from reinsurers on paid losses and loss adjustment expenses	27,811		15,313
Receivable from reinsurers on unpaid losses and loss adjustment expenses	417,323		431,889
Prepaid reinsurance premiums	38,141		29,120
Deferred policy acquisition costs	67,257		58,148
Deferred tax asset, net	213,572		209,535
Real estate, net	29,990		29,968
Operating lease ROU assets	16,092		18,987
Intangible assets, net	61,939		66,835
Goodwill	5,500		49,610
Other assets	124,834		126,858
Total Assets	$	5,573,957	$	5,699,999
Liabilities and Shareholders' Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses	$	3,395,651	$	3,471,147
Unearned premiums	492,950		422,950
Reinsurance premiums payable	32,018		28,514
Total Policy Liabilities and Accruals	3,920,619		3,922,611

Operating lease liabilities	16,926		20,008
Other liabilities	197,990		226,379
Debt less unamortized debt issuance costs	426,579		426,983
Total Liabilities	4,562,114		4,595,981
Shareholders' Equity
Common shares (par value $0.01 per share, 100,000,000 shares authorized, 63,576,311 and 63,427,796 shares issued, respectively)	636		634
Additional paid-in capital	402,144		397,919
Accumulated other comprehensive income (loss) (net of deferred tax expense (benefit) of ($80,975) and ($80,810), respectively)	(296,839)		(298,607)
Retained earnings	1,375,604		1,423,286
Treasury shares, at cost (12,606,968 and 9,464,160 shares, respectively)	(469,702)		(419,214)
Total Shareholders' Equity	1,011,843		1,104,018
Total Liabilities and Shareholders' Equity	$	5,573,957	$	5,699,999

See accompanying notes.

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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 July 1, 2023	$	636	$	400,705	$	(267,480)	$	1,425,038	$	(439,185)	$	1,119,714
Common shares reacquired	—		—		—		—		(30,517)		(30,517)


Share-based compensation	—		1,443		—		—		—		1,443
Net effect of restricted and performance shares issued	—		(4)		—		—		—		(4)

Other comprehensive income (loss)	—		—		(29,359)		—		—		(29,359)
Net income (loss)	—		—		—		(49,434)		—		(49,434)
Balance at September 30, 2023	$	636	$	402,144	$	(296,839)	$	1,375,604	$	(469,702)	$	1,011,843














	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total
Balance at December 31, 2022	$	634	$	397,919	$	(298,607)	$	1,423,286	$	(419,214)	$	1,104,018
Common shares reacquired	—		—		—		—		(50,488)		(50,488)
Common shares issued for compensation	—		1,064		—		—		—		1,064
Share-based compensation	—		3,817		—		—		—		3,817
Net effect of restricted and performance shares issued	2		(656)		—		—		—		(654)
Dividends to shareholders	—		—		—		(2,701)		—		(2,701)



Other comprehensive income (loss)	—		—		1,768		—		—		1,768
Net income (loss)	—		—		—		(44,981)		—		(44,981)
Balance at September 30, 2023	$	636	$	402,144	$	(296,839)	$	1,375,604	$	(469,702)	$	1,011,843

Continued on the following page.

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Continued from the previous page.


	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total
Balance at July 1, 2022	$	634	$	395,540	$	(234,188)	$	1,423,865	$	(415,962)	$	1,169,889
Common shares reacquired	—		—		—		—		(3,252)		(3,252)

Share-based compensation	—		1,291		—		—		—		1,291
Net effect of restricted and performance shares issued	—		(56)		—		—		—		(56)
Dividends to shareholders	—		—		—		(2,698)		—		(2,698)
Other comprehensive income (loss)	—		—		(90,053)		—		—		(90,053)
Net income (loss)	—		—		—		(9,125)		—		(9,125)
Balance at September 30, 2022	$	634	$	396,775	$	(324,241)	$	1,412,042	$	(419,214)	$	1,065,996













	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total
Balance at December 31, 2021	$	633	$	392,941	$	16,284	$	1,434,491	$	(415,962)	$	1,428,387

Common shares reacquired	—		—		—		—		(3,252)		(3,252)
Common shares issued for compensation	—		1,068		—		—		—		1,068
Share-based compensation	—		3,681		—		—		—		3,681
Net effect of restricted and performance shares issued	1		(915)		—		—		—		(914)
Dividends to shareholders	—		—		—		(8,105)		—		(8,105)
Other comprehensive income (loss)	—		—		(340,525)		—		—		(340,525)
Net income (loss)	—		—		—		(14,344)		—		(14,344)
Balance at September 30, 2022	$	634	$	396,775	$	(324,241)	$	1,412,042	$	(419,214)	$	1,065,996

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

(In thousands, except per share data)


	Three Months Ended September 30				Nine Months Ended September 30
	2023		2022		2023		2022
Revenues
Net premiums earned	$	242,420	$	258,355	$	730,068	$	771,337
Net investment income	32,754		24,745		94,714		67,132
Equity in earnings (loss) of unconsolidated subsidiaries	(61)		(6,852)		5,450		5,948
Net investment gains (losses):
Impairment losses	(141)		—		(3,117)		(972)
Portion of impairment losses recognized in other comprehensive income (loss) before taxes	—		—		—		419
Net impairment losses recognized in earnings	(141)		—		(3,117)		(553)
Other net investment gains (losses)	(2,561)		(8,262)		6,273		(45,099)
Total net investment gains (losses)	(2,702)		(8,262)		3,156		(45,652)
Other income	3,336		5,097		6,864		13,215
Total revenues	275,747		273,083		840,252		811,980
Expenses


Net losses and loss adjustment expenses	208,891		198,073		605,245		585,166
Underwriting, policy acquisition and operating expenses:
Operating expense	41,132		45,847		118,394		127,595
DPAC amortization	32,882		34,832		100,385		102,193
SPC U.S. federal income tax expense (benefit)	(175)		433		1,351		1,424
SPC dividend expense (income)	(2,518)		183		3,171		1,697
Interest expense	5,514		5,513		16,478		14,872
Goodwill impairment	44,110		—		44,110		—
Total expenses	329,836		284,881		889,134		832,947

Income (loss) before income taxes	(54,089)		(11,798)		(48,882)		(20,967)
Provision for income taxes:
Current expense (benefit)	(1,228)		1,953		(453)		1,411
Deferred expense (benefit)	(3,427)		(4,626)		(3,448)		(8,034)
Total income tax expense (benefit)	(4,655)		(2,673)		(3,901)		(6,623)
Net income (loss)	(49,434)		(9,125)		(44,981)		(14,344)
Other comprehensive income (loss), after tax, net of reclassification adjustments	(29,359)		(90,053)		1,768		(340,525)
Comprehensive income (loss)	$	(78,793)	$	(99,178)	$	(43,213)	$	(354,869)
Earnings (loss) per share:
Basic	$	(0.95)	$	(0.17)	$	(0.85)	$	(0.27)
Diluted	$	(0.95)	$	(0.17)	$	(0.85)	$	(0.27)
Weighted average number of common shares outstanding:
Basic	51,837		53,990		53,205		54,023
Diluted	52,006		54,124		53,339		54,151
Cash dividends declared per common share	$	—	$	0.05	$	0.05	$	0.15

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Nine Months Ended September 30
	2023		2022
Operating Activities
Net income (loss)	$	(44,981)	$	(14,344)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Goodwill impairment	44,110		—

Depreciation and amortization, net of accretion	20,085		30,046

(Increase) decrease in cash surrender value of BOLI	4,244		528
Net investment (gains) losses	(3,156)		45,652
Share-based compensation	3,817		3,681
Deferred income tax expense (benefit)	(3,448)		(8,034)
Policy acquisition costs, net of amortization (net deferral)	(9,109)		(6,077)
Equity in (earnings) loss of unconsolidated subsidiaries	(5,450)		(5,948)
Distributed earnings from unconsolidated subsidiaries	7,048		28,500

Other, net	884		(534)
Change in:
Premiums receivable	(33,037)		(30,822)
Reinsurance related assets and liabilities	(3,449)		(6,533)
Other assets	5,320		16,506
Reserve for losses and loss adjustment expenses	(75,496)		(35,012)
Unearned premiums	70,000		42,309
Other liabilities	(24,023)		(53,245)
Net cash provided (used) by operating activities	(46,641)		6,673
Investing Activities
Purchases of:
Fixed maturities, available-for-sale	(261,485)		(486,130)
Equity investments	(1,354)		(34,815)
Other investments	(31,845)		(27,576)


Investment in unconsolidated subsidiaries	(17,674)		(25,445)
Proceeds from sales or maturities of:
Fixed maturities, available-for-sale	354,605		433,423
Equity investments	2,633		77,952
Other investments	67,411		22,333
Net sales or (purchases) of fixed maturities, trading	(2,586)		(756)
Return of invested capital from unconsolidated subsidiaries	23,971		33,284
Net sales or maturities (purchases) of short-term investments	31		(72,495)
Unsettled security transactions, net change	4,312		(5,588)
Purchases of capital assets	(3,345)		(3,484)



Other	2,661		(2,452)
Net cash provided (used) by investing activities	137,335		(91,749)
Continued on the following page.

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	Nine Months Ended September 30
	2023		2022
Continued from the previous page.
Financing Activities



Repurchase of common stock	(50,488)		(3,252)

Dividends to shareholders	(5,379)		(8,080)
Capital contribution received from (return of capital to) external segregated portfolio cell participants	50		(6,978)

Other	(2,726)		1,156
Net cash provided (used) by financing activities	(58,543)		(17,154)
Increase (decrease) in cash and cash equivalents	32,151		(102,230)
Cash and cash equivalents at beginning of period	29,959		143,602
Cash and cash equivalents at end of period	$	62,110	$	41,372
Significant Non-Cash Transactions
Dividends declared and not yet paid	$	—	$	2,698
Operating ROU assets obtained in exchange for operating lease liabilities	$	—	$	3,133


Increase (decrease) in fair value of contingent consideration issued in NORCAL acquisition	$	(5,500)	$	—

See accompanying notes.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2023

1. 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 11 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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2022 report on Form 10-K.

Beginning in the third quarter of 2023, ProAssurance operates in four reportable segments as follows: Specialty P&C, Workers' Compensation Insurance, Segregated Portfolio Cell Reinsurance 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 2023 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).

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. 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.

Other than as disclosed 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, 2022 report on Form 10-K.

Derivatives

ProAssurance records derivative instruments at fair value in the Condensed Consolidated Balance Sheets. ProAssurance accounts for the changes in fair value of derivatives depending on whether the derivative is designated as a hedging instrument and if so, the type of hedging relationship. For derivative instruments not designated as hedging instruments, ProAssurance recognizes the change in fair value of the derivative in earnings during the period of change. ProAssurance does not use derivative instruments for trading purposes.

For derivative financial instruments designed as cash flow hedges, ProAssurance formally documents all relationships between the hedging instruments and the hedged items as well as its risk-management objective and strategy for undertaking various hedged transactions. ProAssurance also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, ProAssurance discontinues hedge accounting prospectively.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2023

As of September 30, 2023, ProAssurance uses Interest Rate Swaps that are designated and qualify as highly effective cash flow hedges to manage its exposure to variability in cash flows of forecasted interest payments attributable to variability in the selected base rates on borrowings under the amended Revolving Credit Agreement. Changes in the fair value of derivatives that are designated and qualify as highly effective cash flow hedges are recorded in AOCI, net of tax, and are reclassified into earnings when the hedged cash flows impact earnings. When the change in the fair value of a qualifying cash flow hedge is included in earnings, it is included in the same line item on the Condensed Consolidated Statement of Income and Comprehensive Income as the cash flows from the hedged item. The Company has elected not to offset fair value amounts recognized for the Interest Rate Swaps and fair value of the amounts recognized to reclaim cash collateral or the obligation to return cash collateral executed with counterparties under a master netting arrangement. The cash flows of derivatives used in hedging relationships are classified as either operating, investing, or financing cash flows based on the classification of the hedged item.

Accounting Changes Adopted

Reference Rate Reform - Deferral of LIBOR Sunset Date (ASU 2022-06)

Effective for fiscal years beginning after December 31, 2022 and interim periods within those fiscal years, the FASB amended guidance which defers the LIBOR transition date from December 31, 2022 to December 31, 2024. As of September 30, 2023, ProAssurance has no exposure to LIBOR. ProAssurance adopted the guidance beginning January 1, 2023, and adoption had no material effect on ProAssurance's results of operations, financial position or cash flows.

Presentation of Financial Statements, Income Statement—Reporting Comprehensive Income, Distinguishing Liabilities from Equity, Equity and Compensation—Stock Compensation (ASU 2023-03)

Effective immediately, the FASB amended guidance on July 14, 2023 to align various SEC paragraphs in the Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 120, among other things. ProAssurance adopted the guidance beginning July 14, 2023, and adoption had no material effect on ProAssurance's results of operations, financial position or cash flows.

Accounting Changes Not Yet Adopted

Disclosure Improvements (ASU 2023-06)

In October 2023, the FASB amended guidance to clarify or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements and align the requirements in the Codification with the SEC's regulations. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X becomes effective, with early adoption prohibited. Adoption is not expected to have a material effect on ProAssurance's results of operations, financial position or cash flows.

Employee Retention Credit

In response to COVID-19, the CARES Act was signed into law on March 27, 2020 and contains several provisions for corporations, including the initial version of the ERC. In December 2020 and March 2021, the ERC was extended and expanded from 50% of qualified wages to 70%. The 2020 rules limited qualified wages to $10,000 per employee and applied to employers with 100 or fewer full-time employees in 2019. The rules were expanded in 2021 to raise the qualified wage limit to $10,000 per employee, per quarter. As an eligible employer, NORCAL filed a claim during the second quarter of 2023 for a payroll tax refund of approximately $3.8 million. The Company recorded the expected payroll tax refund as a component of operating expenses on the Condensed Consolidated Statement of Income and Comprehensive Income for the nine months ended September 30, 2023 and as a component of other assets on the Condensed Consolidated Balance Sheet as of September 30, 2023.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2023

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 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 September 30, 2023 and December 31, 2022 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. For more information on the valuation methodologies used regarding securities in the Level 2 and Level 3 categories, see Note 3 of the Notes to Consolidated Financial Statements in ProAssurance’s December 31, 2022 report on Form 10-K.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2023


	September 30, 2023
	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	$	—	$	237,828	$	—	$	237,828
U.S. Government-sponsored enterprise obligations	—		18,871		—		18,871
State and municipal bonds	—		436,268		—		436,268
Corporate debt, multiple observable inputs	—		1,598,018		—		1,598,018
Corporate debt, limited observable inputs	—		—		65,960		65,960

Residential mortgage-backed securities	—		396,676		271		396,947
Agency commercial mortgage-backed securities	—		8,652		—		8,652
Other commercial mortgage-backed securities	—		185,809		—		185,809
Other asset-backed securities	—		406,018		941		406,959
Fixed maturities, trading	—		45,999		—		45,999
Equity investments
Financial	8,594		2,214		287		11,095
Utilities/Energy	845		—		—		845

Industrial	—		—		4,946		4,946
Bond funds	109,907		—		—		109,907
All other	17,127		—		—		17,127
Short-term investments	184,853		62,541		—		247,394
Other investments	1,074		56,150		2,388		59,612
Other assets	—		10,366		—		10,366
Total assets categorized within the fair value hierarchy	$	322,400	$	3,465,410	$	74,793	3,862,603
Assets carried at NAV, which approximates fair value and which are not categorized within the fair value hierarchy, reported as a part of:

Investment in unconsolidated subsidiaries							264,681
Total assets at fair value							$	4,127,284

Liabilities:
Other liabilities	$	10,680	$	—	$	9,500	$	20,180
Total liabilities categorized within the fair value hierarchy	$	10,680	$	—	$	9,500	$	20,180

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2023


	December 31, 2022
	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	$	—	$	221,608	$	—	$	221,608
U.S. Government-sponsored enterprise obligations	—		19,934		—		19,934
State and municipal bonds	—		439,450		—		439,450
Corporate debt, multiple observable inputs	—		1,717,479		—		1,717,479
Corporate debt, limited observable inputs	—		—		63,973		63,973

Residential mortgage-backed securities	—		389,291		249		389,540
Agency commercial mortgage-backed securities	—		9,704		—		9,704
Other commercial mortgage-backed securities	—		194,090		—		194,090
Other asset-backed securities	—		413,989		2,705		416,694
Fixed maturities, trading	—		43,434		—		43,434
Equity investments
Financial	9,850		2,219		303		12,372
Utilities/Energy	854		—		—		854

Industrial	—		—		2,500		2,500
Bond funds	112,136		—		—		112,136
All other	15,876		—		—		15,876
Short-term investments	181,937		63,376		—		245,313
Other investments	1,881		88,783		1,783		92,447