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Basis of Presentation | 9 Months Ended
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Sep. 30, 2021
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Basis of Presentation | Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation, its wholly owned subsidiaries and VIEs in which ProAssurance is the primary beneficiary (ProAssurance, PRA or the Company). See Note 13 for more information on ProAssurance's VIE interests. The financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. ProAssurance’s results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2020 report on Form 10-K. ProAssurance operates in five reportable segments as follows: Specialty P&C, Workers' Compensation Insurance, Segregated Portfolio Cell Reinsurance, Lloyd's Syndicates and Corporate. For more information on the Company's segment reporting, including the nature of products and services provided and financial information by segment, refer to Note 15. Certain insignificant prior period amounts have been reclassified to conform to the current period presentation. Accounting Policies The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosures related to these amounts at the date of the financial statements. The Company evaluates these estimates and assumptions on an ongoing basis based on current and historical developments, market conditions, industry trends and other information that the Company believes to be reasonable under the circumstances, including the potential impacts of the COVID-19 pandemic (see "Item 1A, Risk Factors" in ProAssurance's December 31, 2020 report on Form 10-K for additional information). The Company can make no assurance that actual results will conform to its estimates and assumptions; reported results of operations may be materially affected by changes in these estimates and assumptions. Except as described below, the significant accounting policies followed by ProAssurance in making estimates that materially affect financial reporting are summarized in Note 1 of the Notes to Consolidated Financial Statements in ProAssurance’s December 31, 2020 report on Form 10-K. Business Combinations The Company accounted for its acquisition of NORCAL in accordance with GAAP relating to business combinations which required management to make certain estimates and assumptions including determining the fair value of the non-cash components of the acquisition consideration and the acquisition date fair values of the acquired tangible and identifiable intangible assets and assumed liabilities of NORCAL. Subsequent to the preliminary valuation of the non-cash components of the purchase consideration and net assets acquired, any adjustment identified associated with the purchase price allocation will be evaluated to determine whether the adjustment represents a measurement period adjustment in accordance with GAAP. If the adjustment is deemed to be a measurement period adjustment and is identified within one year of the acquisition, then the measurement period adjustment will be recorded in the current reporting period with a corresponding adjustment to the gain on bargain purchase. Contingent Consideration Contingent consideration in a business combination that is classified as a liability is measured at fair value on the date of acquisition and remeasured to fair value each subsequent reporting period with changes in the fair value recognized in earnings. VOBA VOBA is based on actuarially determined projections and reflects the estimated fair value of in-force contracts acquired in a business combination. VOBA is recorded as an asset when the in-force contracts acquired are expected to generate underwriting income and is recorded as a liability when the in-force contracts acquired are expected to generate an underwriting loss. VOBA liabilities (negative VOBA) are recorded as a component of the reserve for losses and loss adjustment expenses on the Condensed Consolidated Balance Sheets. To the extent negative VOBA relates to unearned premium, it is amortized over a period in proportion to the earn-out of the premium as a reduction to current accident year net losses and loss adjustment expenses. To the extent negative VOBA relates to the DDR reserve, it is amortized over a period in proportion to the approximate consumption of losses as a reduction to prior accident year net losses and loss adjustment expenses. See Note 2 for more information. Accounting Policies Acquired The significant accounting policies adopted as a result of the acquisition of NORCAL on May 5, 2021 and followed by ProAssurance in making estimates that materially affect financial reporting are summarized below. Other Assets and Liabilities Other assets include the acquired NORCAL investments in a deferred compensation rabbi trust which are carried at fair value. These rabbi trust assets are related to other liabilities associated with funded deferred compensation agreements with NORCAL employees and previous members of NORCAL's Board of Directors. Other liabilities include the assumed NORCAL liability for deferred compensation balances associated with the rabbi trust assets and the reported balance is determined based on the amount of elective deferrals and employer contributions adjusted for periodic changes in fair value of the participant balances based on the performance of the funds selected by the participants. ProAssurance recognizes the net change in the fair value of the rabbi trust assets and associated deferred compensation liabilities as a component of net investment income during the period of change. Pension As a result of the NORCAL acquisition, the Company sponsors a frozen defined benefit pension plan which covers substantially all NORCAL employees (except those that were previous employees of Medicus Insurance Company and FD Insurance Company, employees of PPM RRG as well as new hires after December 31, 2013). Accounting for pension benefits requires the use of assumptions for the valuation of the PBO and the expected performance of the plan assets. The Company uses December 31 as the measurement date for calculating its obligation related to this defined benefit pension plan. The PBO for pension benefits represents the present value of all future benefits earned as of the measurement date for vested and non-vested employees. At each measurement date, the Company reviews the various assumptions impacting the amounts recorded for the pension plan including the discount rates, which impacts the recorded value of the PBO and interest costs, and the expected return on plan assets. To estimate the discount rate at the measurement date, the Company uses a bond yield curve model, developed based on pricing and yield information for high quality corporate bonds. The assumption for the expected return on plan assets is based on the anticipated returns that will be earned by the portfolio over the long term. The expected return is influenced, but not determined, by historical portfolio performance. Accounting standards provide for the delayed recognition of differences between actual results and expected or estimated results. This delayed recognition of the differences is amortized into earnings over time. The differences between actual results and expected or estimated results are recognized in full in AOCI. Amounts recognized in AOCI are reclassified to earnings in a systematic manner over the average future service period of participants. Due to the acquisition of NORCAL and the application of GAAP purchase accounting, there were no amounts recorded in AOCI as of September 30, 2021 as the plan assets and benefit obligation are not remeasured on a quarterly basis. Accounting Changes Adopted Clarifying the Interactions between Investments - Equity Securities, Investments - Equity Method and Joint Ventures, and Derivatives and Hedging (ASU 2020-01) Effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, the FASB amended guidance that clarifies the accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. ProAssurance adopted the guidance beginning January 1, 2021, and adoption had no material effect on ProAssurance's results of operations, financial position or cash flows. Accounting Changes Not Yet Adopted ProAssurance is not aware of any accounting changes not yet adopted as of September 30, 2021 that could have a material impact on its results of operations, financial position or cash flows. Credit Losses ProAssurance's premiums receivable and reinsurance receivables are exposed to credit losses but to-date have not experienced any significant amount of credit losses. See Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K for further information on how the Company estimates and measures expected credit losses on its premiums receivable and reinsurance receivables. ProAssurance's available-for-sale fixed maturity investments are also exposed to credit losses. See Note 4 for information on ProAssurance's allowance for expected credit losses on its available-for-sale fixed maturities. ProAssurance’s premiums receivable on its Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 is reported net of the related allowance for expected credit losses of $7.7 million and $6.1 million, respectively. The following tables present a roll forward of the allowance for expected credit losses related to the Company's premiums receivable for the three and nine months ended September 30, 2021 and 2020.
(In thousands) |  |  |  |  | Premiums Receivable, Net |  | Allowance for Expected Credit Losses |  |
Balance, July 1, 2021 |  |  |  |  | $ | 288,589 |  |  | $ | 7,729 |  |  |
Provision for expected credit losses |  |  |  |  |  |  | 48 |  |  |
Write offs charged against the allowance |  |  |  |  |  |  | (125) |  |  |
Recoveries of amounts previously written off |  |  |  |  |  |  | 24 |  |  |
Balance, September 30, 2021 |  |  |  |  | $ | 288,819 |  |  | $ | 7,676 |  |  |
(In thousands) |  |  |  |  | Premiums Receivable, Net |  | Allowance for Expected Credit Losses |  |
Balance, December 31, 2020 |  |  |  |  | $ | 201,395 |  |  | $ | 6,131 |  |  |
Initial allowance recognized in the period for NORCAL premiums receivable(1) |  |  |  |  |  |  | 2,137 |  |  |
Provision for expected credit losses |  |  |  |  |  |  | 505 |  |  |
Write offs charged against the allowance |  |  |  |  |  |  | (1,243) |  |  |
Recoveries of amounts previously written off |  |  |  |  |  |  | 146 |  |  |
Balance, September 30, 2021 |  |  |  |  | $ | 288,819 |  |  | $ | 7,676 |  |  |
(In thousands) |  |  |  |  | Premiums Receivable, Net |  | Allowance for Expected Credit Losses
Balance, July 1, 2020 |  |  |  |  | $ | 234,840 |  |  | $ | 6,627 |
Provision for expected credit losses |  |  |  |  |  |  | 123 |
Write offs charged against the allowance |  |  |  |  |  |  | (404) |
Recoveries of amounts previously written off |  |  |  |  |  |  | 270 |
Balance, September 30, 2020 |  |  |  |  | $ | 237,894 |  |  | $ | 6,616 |
(In thousands) |  |  |  |  | Premiums Receivable, Net |  | Allowance for Expected Credit Losses
Balance, December 31, 2019 |  |  |  |  | $ | 249,540 |  |  | $ | 1,590 |
Cumulative-effect adjustment, before tax (2) |  |  |  |  |  |  | 5,160 |
Provision for expected credit losses |  |  |  |  |  |  | 616 |
Write offs charged against the allowance |  |  |  |  |  |  | (1,078) |
Recoveries of amounts previously written off |  |  |  |  |  |  | 328 |
Balance, September 30, 2020 |  |  |  |  | $ | 237,894 |  |  | $ | 6,616 |
(1) Represents an initial allowance for expected credit losses recognized during the second quarter of 2021 for NORCAL's premiums receivable to conform NORCAL to ProAssurance's accounting policies. See Note 2 for more information.
(2) Due to the adoption of ASU 2016-13, ProAssurance recorded a cumulative-effect adjustment to beginning retained earnings as of January 1, 2020 to increase its consolidated allowance for expected credit losses related to its premiums receivable. See Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K.
ProAssurance’s expected credit losses associated with its reinsurance receivables (related to both paid and unpaid losses) were nominal in amount as of September 30, 2021 and December 31, 2020. ProAssurance has other financial assets and off-balance sheet commitments that are exposed to credit losses; however, expected credit losses associated with these assets and commitments were nominal in amount as of September 30, 2021 and December 31, 2020. Other Liabilities Other liabilities consisted of the following:
(In thousands) |  | September 30, 2021 |  | December 31, 2020
SPC dividends payable |  | $ | 64,472 |  |  | $ | 68,865 |
Unpaid shareholder dividends |  | 2,700 |  |  | 2,694 |
Deferred compensation liabilities |  | 51,456 |  |  | 30,334 |
Contingent consideration |  | 24,000 |  |  | — |
All other |  | 136,648 |  |  | 80,146 |
Total other liabilities |  | $ | 279,276 |  |  | $ | 182,039 |
SPC dividends payable represents the undistributed equity contractually payable to the external cell participants of SPCs operated by ProAssurance's Cayman Islands subsidiaries, Inova Re and Eastern Re. Unpaid shareholder dividends represent common stock dividends declared by ProAssurance's Board that had not yet been paid as of September 30, 2021. Deferred compensation liabilities represent the amount of elective deferrals and employer contributions adjusted for periodic changes in the fair value of the participant balances based on the performance of the funds selected by the participants. See additional information on the deferred compensation liabilities in Note 3. Contingent consideration represents a portion of the purchase consideration for the NORCAL acquisition and depends on the after-tax development of NORCAL's ultimate net losses over a three year period beginning on December 31, 2020. See additional information on the contingent consideration in Note 2

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