pra-20210331

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 March 31, 2021 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 April 30, 2021, there were 53,953,399 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)
ASU			Accounting Standards Update
BEAT			Base erosion anti-abuse tax
Board			Board of Directors of ProAssurance Corporation
BOLI			Business owned life insurance
CARES Act			Coronavirus Aid, Relief and Economic Security Act


CODM			Chief Operating Decision Maker


COVID-19			Coronavirus Disease 2019

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

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

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

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

NAV			Net asset value

NOL			Net operating loss

NORCAL			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
PDR			Premium deficiency reserve


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


SEC			Securities and Exchange Commission
SPA			Special Purpose Arrangement
SPC			Segregated portfolio cell

Specialty P&C			Specialty Property and Casualty

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Term			Meaning
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

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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 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:


			changes in general economic conditions, including the impact of inflation or deflation and unemployment;
			our ability to maintain our dividend payments;
			regulatory, legislative and judicial actions or decisions that could affect our business plans or operations, including changes in interpretations of certain coverages as a result of COVID-19;
			the enactment or repeal of tort reforms;
			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;
			changes in the interest and tax rate environment, including the actions taken by the federal government and Federal Reserve in response to COVID-19;
			resolution of uncertain tax matters and changes in tax laws, including the impact of the CARES Act;
			changes in laws or government regulations regarding financial markets or market activity that may affect our business;
			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;
			performance of financial markets affecting the fair value of our investments or making it difficult to determine the value of our investments;
			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;
			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 Syndicates 1729 and 6131;
			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;
			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;
			the effect of cyclical insurance industry trends on our underwriting, including demand and pricing in the insurance and reinsurance markets in which we operate;
			uncertainties inherent in the estimate of our loss and loss adjustment expense reserve and reinsurance recoverable;
			changes in the availability, cost, quality or collectability of insurance/reinsurance;
			the results of litigation, including pre- or post-trial motions, trials and/or appeals we undertake;
			effects on our claims costs from mass tort litigation that are different from that anticipated by us;
			allegations of bad faith which may arise from our handling of any particular claim, including failure to settle;

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			loss or consolidation of independent agents, agencies, brokers or brokerage firms;
			changes in our organization, compensation and benefit plans;
			changes in the business or competitive environment may limit the effectiveness of our business strategy and impact our revenues;
			our ability to retain and recruit senior management and other qualified personnel;
			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;
			the impact of a catastrophic event, including the recent COVID-19 pandemic, as it relates to our business and insurance operations, investment results, Lloyd's Syndicates and our insured risks;
			the impact of the COVID-19 pandemic and related economic conditions on our premium volume, loss reserves, investment portfolio, asset valuations, business operations and workforce;
			the impact of a catastrophic man-made event, such as acts of terrorism, acts of war and civil and political unrest;
			the effects of terrorism-related insurance legislation and laws;
			guaranty funds and other state assessments;
			our ability to achieve continued growth through expansion into new markets or through acquisitions or business combinations;
			failure to successfully integrate NORCAL to achieve expected results or synergies;
			changes to the ratings assigned by rating agencies to our holding company or insurance subsidiaries, individually or as a group;
			provisions in our charter documents, Delaware law and state insurance laws may impede attempts to replace or remove management or may impede a takeover;
			state insurance restrictions may prohibit assets held by our insurance subsidiaries, including cash and investment securities, from being used for general corporate purposes;
			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
			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 synergies; 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:
			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;
			Syndicate 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;
			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;
			rating agencies could downgrade their ratings of Lloyd's as a whole; and
			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 December 31, 2020 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

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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) - March 31, 2021 AND DECEMBER 31, 2020	8

	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2021 AND 2020	9

	CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2021 AND 2020	10

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2021 AND 2020	11

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	13

	BASIS OF PRESENTATION	13
	FAIR VALUE MEASUREMENT	15
	INVESTMENTS	23
	RETROACTIVE INSURANCE CONTRACTS	30
	INCOME TAXES	30
	GOODWILL	31
	RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES	32
	COMMITMENTS AND CONTINGENCIES	34
	LEASES	35
	DEBT	36

	SHAREHOLDERS' EQUITY	37
	VARIABLE INTEREST ENTITIES	38
	EARNINGS (LOSS) PER SHARE	38
	SEGMENT INFORMATION	39
	SUBSEQUENT EVEN T	43

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	44

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	97

ITEM 4.	CONTROLS AND PROCEDURES	100

PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	100
ITEM 1A.	RISK FACTORS	100
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	100
ITEM 6.	EXHIBITS	101
SIGNATURE		102

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)


	March 31, 2021		December 31, 2020
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost, $2,509,623 and $2,361,575, respectively; allowance for expected credit losses, none as of March 31, 2021 and $552 as of December 31, 2020)	$	2,563,273	$	2,457,531
Fixed maturities, trading, at fair value (cost, $44,819 and $47,907, respectively)	45,151		48,456
Equity investments, at fair value (cost, $74,083 and $113,709, respectively)	77,537		120,101
Short-term investments	280,993		337,813
Business owned life insurance	66,932		67,847
Investment in unconsolidated subsidiaries	299,360		310,529
Other investments (at fair value, $69,251 and $44,116, respectively, otherwise at cost or amortized cost)	71,621		47,068
Total Investments	3,404,867		3,389,345
Cash and cash equivalents	214,835		215,782



Premiums receivable, net	210,560		201,395
Receivable from reinsurers on paid losses and loss adjustment expenses	10,451		14,370
Receivable from reinsurers on unpaid losses and loss adjustment expenses	393,420		385,087
Prepaid reinsurance premiums	34,802		35,885
Deferred policy acquisition costs	47,616		47,196
Deferred tax asset, net	67,699		57,105
Real estate, net	30,594		30,529
Operating lease ROU assets	18,219		19,013
Intangible assets, net	64,173		65,720
Goodwill	49,610		49,610
Other assets	127,692		143,766
Total Assets	$	4,674,538	$	4,654,803
Liabilities and Shareholders' Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses	$	2,438,250	$	2,417,179
Unearned premiums	375,246		361,547
Reinsurance premiums payable	31,039		39,998
Total Policy Liabilities	2,844,535		2,818,725

Operating lease liabilities	19,168		20,116
Other liabilities	205,097		182,039
Debt less unamortized debt issuance costs	284,422		284,713
Total Liabilities	3,353,222		3,305,593
Shareholders' Equity
Common shares (par value $0.01 per share, 100,000,000 shares authorized, 63,277,721 and 63,217,708 shares issued, respectively)	633		632
Additional paid-in capital	388,924		388,150
Accumulated other comprehensive income (loss) (net of deferred tax expense (benefit) of $11,065 and $19,386, respectively)	41,522		75,227
Retained earnings	1,306,199		1,301,163
Treasury shares, at cost (9,325,180 shares as of each respective period end)	(415,962)		(415,962)
Total Shareholders' Equity	1,321,316		1,349,210
Total Liabilities and Shareholders' Equity	$	4,674,538	$	4,654,803

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Capital (Unaudited)

(In thousands)


	ProAssurance Shareholders' Equity











	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total
Balance at December 31, 2020	$	632	$	388,150	$	75,227	$	1,301,163	$	(415,962)	$	1,349,210


Common shares issued for compensation and effect of shares reissued to stock purchase plan	—		8		—		—		—		8
Share-based compensation	—		1,024		—		—		—		1,024
Net effect of restricted and performance shares issued	1		(258)		—		—		—		(257)
Dividends to shareholders	—		—		—		(2,699)		—		(2,699)



Other comprehensive income (loss)	—		—		(33,705)		—		—		(33,705)
Net income (loss)	—		—		—		7,735		—		7,735
Balance at March 31, 2021	$	633	$	388,924	$	41,522	$	1,306,199	$	(415,962)	$	1,321,316














	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total
Balance at December 31, 2019	$	631	$	384,551	$	36,955	$	1,505,738	$	(415,962)	$	1,511,913
Cumulative-effect adjustment- ASU 2016-13 adoption	—		—		—		(4,076)		—		(4,076)

Common shares issued for compensation and effect of shares reissued to stock purchase plan	—		33		—		—		—		33
Share-based compensation	—		1,017		—		—		—		1,017
Net effect of restricted and performance shares issued	1		(869)		—		—		—		(868)
Dividends to shareholders	—		—		—		(16,691)		—		(16,691)
Other comprehensive income (loss)	—		—		(41,865)		—		—		(41,865)
Net income (loss)	—		—		—		(21,954)		—		(21,954)
Balance at March 31, 2020	$	632	$	384,732	$	(4,910)	$	1,463,017	$	(415,962)	$	1,427,509

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 March 31
		2021		2020
Revenues
Net premiums earned		$	187,358	$	203,855
Net investment income		15,017		20,830
Equity in earnings (loss) of unconsolidated subsidiaries		6,788		(1,562)
Net realized investment gains (losses):
Impairment losses		—		(1,817)
Portion of impairment losses recognized in other comprehensive income (loss) before taxes		—		654
Net impairment losses recognized in earnings		—		(1,163)
Other net realized investment gains (losses)		8,849		(27,510)
Total net realized investment gains (losses)		8,849		(28,673)

Other income		2,005		2,251
Total revenues		220,017		196,701
Expenses


Net losses and loss adjustment expenses		149,785		164,832
Underwriting, policy acquisition and operating expenses:
Operating expense		31,522		34,773
DPAC amortization		24,929		27,283
SPC U.S. federal income tax expense		356		222
SPC dividend expense (income)		1,742		(508)
Interest expense		3,212		4,129

Total expenses		211,546		230,731
Income (loss) before income taxes		8,471		(34,030)
Provision for income taxes:
Current expense (benefit)		3,008		(1,852)
Deferred expense (benefit)		(2,272)		(10,224)
Total income tax expense (benefit)		736		(12,076)
Net income (loss)		7,735		(21,954)
Other comprehensive income (loss), after tax, net of reclassification adjustments		(33,705)		(41,865)
Comprehensive income (loss)		$	(25,970)	$	(63,819)
Earnings (loss) per share
Basic		$	0.14	$	(0.41)
Diluted		$	0.14	$	(0.41)
Weighted average number of common shares outstanding:
Basic		53,918		53,808
Diluted		53,998		53,885
Cash dividends declared per common share		$	0.05	$	0.31

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Three Months Ended March 31
	2021		2020
Operating Activities
Net income (loss)	$	7,735	$	(21,954)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization, net of accretion	6,722		4,734

(Increase) decrease in cash surrender value of BOLI	915		(457)
Net realized investment (gains) losses	(8,849)		28,673
Share-based compensation	1,031		1,011
Deferred income tax expense (benefit)	(2,272)		(10,224)
Policy acquisition costs, net of amortization (net deferral)	(420)		(599)
Equity in (earnings) loss of unconsolidated subsidiaries	(6,788)		1,562
Distributed earnings from unconsolidated subsidiaries	5,658		1,585
Other	(661)		(703)
Other changes in assets and liabilities:
Premiums receivable	(9,165)		(22,442)
Reinsurance related assets and liabilities	(12,290)		(4,623)
Other assets	13,151		14,268
Reserve for losses and loss adjustment expenses	21,071		(15,478)
Unearned premiums	13,699		30,202
Other liabilities	(837)		(17,604)
Net cash provided (used) by operating activities	28,700		(12,049)
Investing Activities
Purchases of:
Fixed maturities, available-for-sale	(342,197)		(227,503)
Equity investments	(38,232)		(23,136)
Other investments	(33,252)		(6,065)


Investment in unconsolidated subsidiaries	(5,319)		(17,180)
Proceeds from sales or maturities of:
Fixed maturities, available-for-sale	195,266		180,698
Equity investments	82,048		157,652
Other investments	12,026		6,026
Net sales or (purchases) of fixed maturities, trading	3,163		(407)
Return of invested capital from unconsolidated subsidiaries	17,618		1,481
Net sales or maturities (purchases) of short-term investments	56,836		(7,441)
Unsettled security transactions, net change	27,025		12,656
Purchases of capital assets	(1,243)		(2,750)


Other	—		(2,206)
Net cash provided (used) by investing activities	(26,261)		71,825
Continued on the following page.

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	Three Months Ended March 31
	2021		2020
Continued from the previous page.
Financing Activities

Repayments of Mortgage Loans	(390)		(376)


Dividends to shareholders	(2,686)		(16,714)
Capital contribution received from (return of capital to) external segregated portfolio cell participants	(53)		204
Other	(257)		(1,090)
Net cash provided (used) by financing activities	(3,386)		(17,976)
Increase (decrease) in cash and cash equivalents	(947)		41,800
Cash and cash equivalents at beginning of period	215,782		175,369
Cash and cash equivalents at end of period	$	214,835	$	217,169
Significant Non-Cash Transactions
Dividends declared and not yet paid	$	2,699	$	16,691

See accompanying notes.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation and its wholly owned 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, 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. In connection with its preparation of the Condensed Consolidated Financial Statements, ProAssurance evaluated events that occurred subsequent to March 31, 2021 for recognition or disclosure in its financial statements and notes to financial statements. Please see Note 15 for additional information.

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 14.

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.

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.

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 March 31, 2021 that could have a material impact on its results of operations, financial position or cash flows.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

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 3 for information on ProAssurance's allowance for expected credit losses on it's available-for-sale fixed maturities.

ProAssurance’s premiums receivable on its Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 is reported net of the related allowance for expected credit losses of $6.1 million in each period. The following tables present a roll forward of the allowance for expected credit losses related to the Company's premiums receivable for the three months ended March 31, 2021 and 2020.


(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, December 31, 2020	$	201,395	$	6,131

Provision for expected credit losses			105

Write offs charged against the allowance			(232)
Recoveries of amounts previously written off			78
Balance, March 31, 2021	$	210,560	$	6,082


(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, December 31, 2019	$	249,540	$	1,590
Cumulative-effect adjustment, before tax*			5,160
Provision for expected credit losses			88

Write offs charged against the allowance			(689)
Recoveries of amounts previously written off			48
Balance, March 31, 2020	$	266,822	$	6,197
*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 March 31, 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 March 31, 2021 and December 31, 2020.

Other Liabilities

Other liabilities consisted of the following:


(In thousands)	March 31, 2021		December 31, 2020
SPC dividends payable	$	69,732	$	68,865
Unpaid shareholder dividends	2,699		2,694
All other	132,666		110,480
Total other liabilities	$	205,097	$	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 March 31, 2021.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

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 March 31, 2021 and December 31, 2020 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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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021


	March 31, 2021
	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	$	—	$	102,877	$	—	$	102,877
U.S. Government-sponsored enterprise obligations	—		11,944		—		11,944
State and municipal bonds	—		322,465		—		322,465
Corporate debt, multiple observable inputs	—		1,421,097		—		1,421,097
Corporate debt, limited observable inputs	—		—		7,769		7,769

Residential mortgage-backed securities	—		270,059		1,489		271,548
Agency commercial mortgage-backed securities	—		13,718		—		13,718
Other commercial mortgage-backed securities	—		121,319		—		121,319
Other asset-backed securities	—		282,712		7,824		290,536
Fixed maturities, trading	—		45,151		—		45,151
Equity investments




Bond funds	60,264		—		—		60,264
All other	17,273		—		—		17,273
Short-term investments	259,075		21,918		—		280,993
Other investments	29		67,070		2,152		69,251
Other assets	—		836		—		836
Total assets categorized within the fair value hierarchy	$	336,641	$	2,681,166	$	19,234	3,037,041
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							226,898
Total assets at fair value							$	3,263,939

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021


	December 31, 2020
	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	$	—	$	107,059	$	—	$	107,059
U.S. Government-sponsored enterprise obligations	—		12,261		—		12,261
State and municipal bonds	—		332,920		—		332,920
Corporate debt, multiple observable inputs	—		1,326,077		—		1,326,077
Corporate debt, limited observable inputs	—		—		3,265		3,265

Residential mortgage-backed securities	—		274,509		2,032		276,541
Agency commercial mortgage-backed securities	—		13,310		—		13,310
Other commercial mortgage-backed securities	—		113,092		—		113,092
Other asset-backed securities	—		266,345		6,661		273,006
Fixed maturities, trading	—		48,456		—		48,456
Equity investments
Financial	13,810		—		—		13,810
Utilities/Energy	564		—		—		564
Consumer oriented	1,262		—		—		1,262
Industrial	2,240		—		—		2,240
Bond funds	69,475		—		—		69,475
All other	20,202		—		—		20,202
Short-term investments	307,695		30,118		—		337,813
Other investments	1,509		42,607		—		44,116
Other assets	—		329		—		329
Total assets categorized within the fair value hierarchy	$	416,757	$	2,567,083	$	11,958	2,995,798
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							12,548
Investment in unconsolidated subsidiaries							233,711
Total assets at fair value							$	3,242,057

The fair values for securities included in the Level 2 category, with the few exceptions described below, were developed by one of several third party, nationally recognized pricing services, including services that price only certain types of securities. Each service uses complex methodologies to determine values for securities and subject the values they develop to quality control reviews. Management selected a primary source for each type of security in the portfolio and reviewed the values provided for reasonableness by comparing data to alternate pricing services and to available market and trade data. Values that appeared inconsistent were further reviewed for appropriateness. Any value that did not appear reasonable was discussed with the service that provided the value and adjusted, if necessary. There were no material changes to the values supplied by the pricing services as of March 31, 2021 and December 31, 2020.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Level 2 Valuations

Below is a summary description of the valuation methodologies primarily used by the pricing services for securities in the Level 2 category, by security type:

U.S. Treasury obligations were valued based on quoted prices for identical assets, or, in markets that are not active, quotes for similar assets, taking into consideration adjustments for variations in contractual cash flows and yields to maturity.

U.S. Government-sponsored enterprise obligations were valued using pricing models that consider current and historical market data, normal trading conventions, credit ratings and the particular structure and characteristics of the security being valued, such as yield to maturity, redemption options, and contractual cash flows. Adjustments to model inputs or model results were included in the valuation process when necessary to reflect recent regulatory, government or corporate actions or significant economic, industry or geographic events affecting the security’s fair value.

State and municipal bonds were valued using a series of matrices that considered credit ratings, the structure of the security, the sector in which the security falls, yields and contractual cash flows. Valuations were further adjusted, when necessary, to reflect the expected effect on fair value of recent significant economic or geographic events or ratings changes.

Corporate debt, multiple observable inputs consisted primarily of corporate bonds, but also included a small number of bank loans. The methodology used to value Level 2 corporate bonds was the same as the methodology previously described for U.S. Government-sponsored enterprise obligations. Bank loans were valued based on an average of broker quotes for the loans in question, if available. If quotes were not available, the loans were valued based on quoted prices for comparable loans or, if the loan was newly issued, by comparison to similar seasoned issues. Broker quotes were compared to actual trade prices to permit assessment of the reliability of the quotes; unreliable quotes were not considered in quoted averages.

Residential and commercial mortgage-backed securities were valued using a pricing matrix which considers the issuer type, coupon rate and longest cash flows outstanding. The matrix used was based on the most recently available market information. Agency and non-agency collateralized mortgage obligations were both valued using models that consider the structure of the security, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data.

Other asset-backed securities were valued using models that consider the structure of the security, monthly payment information, current and historical information regarding prepayment speeds, ratings and ratings updates, and current and historical interest rate and interest rate spread data. Spreads and prepayment speeds consider collateral type.

Fixed maturities, trading, are held by the Lloyd's Syndicates segment and include U.S. Treasury obligations, corporate debt with multiple observable inputs and other asset-backed securities. These securities were valued using the respective valuation methodologies discussed above for each security type.

Short-term investments were securities maturing within one year, carried at fair value which approximated the cost of the securities due to their short-term nature.

Other investments consisted primarily of convertible bonds valued using a pricing model that incorporated selected dealer quotes as well as current market data regarding equity prices and risk free rates. If dealer quotes were unavailable for the security being valued, quotes for securities with similar terms and credit status were used in the pricing model. Dealer quotes selected for use were those considered most accurate based on parameters such as underwriter status and historical reliability.

Other assets consisted of an interest rate cap derivative instrument, valued using a model which considers the volatilities from other instruments with similar maturities, strike prices, durations and forward yield curves. Under the terms of the interest rate cap agreement, ProAssurance paid a premium of $2 million for the right to receive cash payments based upon a notional amount of $35 million if and when the three-month LIBOR rises above 2.35%. The Company's variable-rate Mortgage Loans bear an interest rate of three-month LIBOR plus 1.325%.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Level 3 Valuations

Below is a summary description of the valuation methodologies used as well as quantitative information regarding securities in the Level 3 category, by security type:

Level 3 Valuation Methodologies

Corporate debt, limited observable inputs consisted of corporate bonds valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments of credit quality were based on NRSRO ratings, if available, or were determined by management if not available. At March 31, 2021, 61% of the securities were rated and the average rating was BB+. At December 31, 2020, 100% of the securities were rated and the average rating was BB+.

Residential mortgage-backed and other asset-backed securities consisted of securitizations of receivables valued using dealer quotes for similar securities or discounted cash flow models using yields currently available for similar securities. Similar securities are defined as securities of comparable credit quality that have like terms and payment features. Assessments of credit quality were based on NRSRO ratings, if available, or were subjectively determined by management if not available. At March 31, 2021, 83% of the securities were rated and the average rating was AA+. At December 31, 2020, 51% of the securities were rated and the average rating was AA-.

Other investments consisted of convertible securities for which limited observable inputs were available at March 31, 2021. The securities were valued internally based on expected cash flows, including the expected final recovery, discounted at a yield that considered the lack of liquidity and the financial status of the issuer.

Quantitative Information Regarding Level 3 Valuations

Fair Value at

($ in thousands)

March 31, 2021

December 31, 2020

Valuation Technique

Unobservable Input

Range
(Weighted Average)

Assets:

Corporate debt, limited observable inputs

$7,769

$3,265

Market Comparable
Securities

Comparability Adjustment

0% - 5% (2.5%)

Discounted Cash Flows

Comparability Adjustment

0% - 5% (2.5%)

Residential mortgage-backed securities

$1,489

$2,032

Market Comparable
Securities

Comparability Adjustment

0% - 5% (2.5%)

Discounted Cash Flows

Comparability Adjustment

0% - 5% (2.5%)

Other asset-backed securities

$7,824

$6,661

Market Comparable
Securities

Comparability Adjustment

0% - 5% (2.5%)

Discounted Cash Flows

Comparability Adjustment

0% - 5% (2.5%)

Other investments

$2,152

$—

Discounted Cash Flows

Comparability Adjustment

0% - 10% (5%)

The significant unobservable inputs used in the fair value measurement of the above listed securities were the valuations of comparable securities with similar issuers, credit quality and maturity. Changes in the availability of comparable securities could result in changes in the fair value measurements.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Fair Value Measurements - Level 3 Assets

The following tables (the Level 3 Tables) present summary information regarding changes in the fair value of assets measured at fair value using Level 3 inputs.


	March 31, 2021
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt		Asset-backed Securities		Other Investments		Total
Balance December 31, 2020	$	3,265	$	8,693	$	—	$	11,958
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net investment income	1		(2)		—		(1)

Net realized investment gains (losses)	—		(11)		—		(11)
Included in other comprehensive income	20		(179)		—		(159)
Purchases	4,875		7,357		—		12,232
Sales	(17)		(304)		—		(321)
Transfers in	858		—		2,152		3,010
Transfers out	(1,233)		(6,241)		—		(7,474)
Balance March 31, 2021	$	7,769	$	9,313	$	2,152	$	19,234
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—	$	—	$	—


	March 31, 2020
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt		Asset-backed Securities		Other Investments		Total
Balance December 31, 2019	$	5,079	$	2,992	$	3,086	$	11,157
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:


Net realized investment gains (losses)	—		—		(222)		(222)
Included in other comprehensive income	(83)		(122)		—		(205)
Purchases	—		3,422		—		3,422
Sales	(1,707)		—		—		(1,707)
Transfers in	945		605		—		1,550
Transfers out	(794)		—		(1,526)		(2,320)
Balance March 31, 2020	$	3,440	$	6,897	$	1,338	$	11,675
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—	$	(222)	$	(222)

Transfers

Transfers shown in the preceding Level 3 tables were as of the end of the period in which the transfer occurred. All transfers were to or from Level 2.

All transfers in and out of Level 3 during the three months ended March 31, 2021 and 2020 related to securities held for which the level of market activity for identical or nearly identical securities varies from period to period. The securities were valued using multiple observable inputs when those inputs were available; otherwise the securities were valued using limited observable inputs.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Fair Values Not Categorized

At March 31, 2021 and December 31, 2020, certain LPs/LLCs and investment funds measure fund assets at fair value on a recurring basis and provide a NAV for ProAssurance's interest. The carrying value of these interests is based on the NAV provided and was considered to approximate the fair value of the interests. For investment in unconsolidated subsidiaries, ProAssurance recognizes any changes in the NAV of its interests in equity in earnings (loss) of unconsolidated subsidiaries during the period of change. In accordance with GAAP, the fair value of these investments was not classified within the fair value hierarchy. The amount of ProAssurance's unfunded commitments related to these investments as of March 31, 2021 and fair values of these investments as of March 31, 2021 and December 31, 2020 were as follows:


	Unfunded Commitments	Fair Value
(In thousands)	March 31, 2021	March 31, 2021		December 31, 2020
Equity investments:
Mortgage fund (1)	None	$	—	$	12,548
Investment in unconsolidated subsidiaries:
Private debt funds (2)	$11,308	16,317		16,387

Long/short equity funds (3)	None	632		596
Non-public equity funds (4)	$42,554	137,648		138,357

Credit funds (5)	$1,653	26,943		34,848

Strategy focused funds (6)	$36,927	45,358		43,523
		226,898		233,711
Total investments carried at NAV		$	226,898	$	246,259

Below is additional information regarding each of the investments listed in the table above as of March 31, 2021.

(1)This investment fund was focused on the structured mortgage market. The fund primarily invested in U.S. Agency mortgage-backed securities. Redemptions are allowed at the end of any calendar quarter with a prior notice requirement of 65 days and are paid within 45 days at the end of the redemption dealing day.

(2)This investment is comprised of interests in two unrelated LP funds that are structured to provide interest distributions primarily through diversified portfolios of private debt instruments. One LP allows redemption by special consent, while the other does not permit redemption. Income and capital are to be periodically distributed at the discretion of the LPs over an anticipated time frame that spans from three to eight years.

(3)This investment holds primarily long and short North American equities and targets absolute returns using strategies designed to take advantage of market opportunities. Redemptions are permitted; however, redemptions above specified thresholds (lowest threshold is 90%) may be only partially payable until after a fund audit is completed and are then payable within 30 days.

(4)This investment is comprised of interests in multiple unrelated LP funds, each structured to provide capital appreciation through diversified investments in private equity, which can include investments in buyout, venture capital, debt including senior, second lien and mezzanine, distressed debt, collateralized loan obligations and other private equity-oriented LPs. Two of the LPs allow redemption by terms set forth in the LP agreements; the others do not permit redemption. Income and capital are to be periodically distributed at the discretion of the LP over time frames that are anticipated to span up to ten years.

(5)This investment is comprised of four unrelated LP funds. Two funds seek to obtain superior risk-adjusted absolute returns through a diversified portfolio of debt securities, including bonds, loans and other asset-backed instruments. A third fund focuses on private middle market company mezzanine loans, while the remaining fund seeks event driven opportunities across the corporate credit spectrum. Two funds are allowed redemptions at any quarter-end with a prior notice requirement of 90 days; one fund permits redemption at any quarter-end with a prior notice requirement of 180 days and one fund does not allow redemptions. For the fund that does not allow redemptions, income and capital are to be periodically distributed at the discretion of the LP over time frames that are anticipated to span up to twelve years.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

(6) This investment is comprised of multiple unrelated LPs/LLCs funds. One fund is a LLC focused on investing in North American consumer products companies, comprised of equity and equity-related securities, as well as debt instruments. A second fund is focused on aircraft investments, along with components and assets related to aircrafts. For both funds, redemptions are not permitted. Another fund is a LP focused on North American energy infrastructure assets that allows redemption with consent of the General Partner. The remaining funds are real estate focused LPs, one of which allows for redemption with prior notice.

ProAssurance may not sell, transfer or assign its interest in any of the above LPs/LLCs without special consent from the LPs/LLCs.

Nonrecurring Fair Value Measurement

ProAssurance did not have any assets or liabilities that were measured at fair value on a nonrecurring basis at March 31, 2021or December 31, 2020.

Financial Instruments - Methodologies Other Than Fair Value

The following table provides the estimated fair value of the Company's financial instruments that, in accordance with GAAP for the type of investment, are measured using a methodology other than fair value. Fair values provided primarily fall within the Level 3 fair value category.


	March 31, 2021				December 31, 2020
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	66,932	$	66,932	$	67,847	$	67,847
Other investments	$	2,370	$	2,370	$	2,952	$	2,952
Other assets	$	33,869	$	33,885	$	31,128	$	31,141
Financial liabilities:
Senior notes due 2023*	$	250,000	$	271,105	$	250,000	$	269,160

Mortgage Loans*	$	35,723	$	35,723	$	36,113	$	36,113
Other liabilities	$	32,548	$	32,548	$	30,334	$	30,334
* Carrying value excludes unamortized debt issuance costs.

The fair value of the BOLI was equal to the cash surrender value associated with the policies on the valuation date.

Other investments listed in the table above include FHLB common stock carried at cost and an annuity investment carried at amortized cost. Two of ProAssurance's insurance subsidiaries are members of an FHLB. The estimated fair value of the FHLB common stock was based on the amount the subsidiaries would receive if their memberships were canceled, as the memberships cannot be sold. The fair value of the annuity represents the present value of the expected future cash flows discounted using a rate available in active markets for similarly structured instruments.

Other assets and other liabilities primarily consisted of related investment assets and liabilities associated with funded deferred compensation agreements. The fair value of the funded deferred compensation assets was based upon quoted market prices, which is categorized as a Level 1 valuation, and had a fair value of $32.8 million and $30.6 million at March 31, 2021 and December 31, 2020, respectively. The deferred compensation liabilities are adjusted to match the fair value of the deferred compensation assets. Other assets also included an unsecured note receivable under a separate line of credit agreement. The fair value of the note receivable was based on the present value of expected cash flows from the note receivable, discounted at market rates on the valuation date for receivables with similar credit standings and similar payment structures.

The fair value of the debt was estimated based on the present value of expected future cash outflows, discounted at rates available on the valuation date for similar debt issued by entities with a similar credit standing to ProAssurance.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

3. Investments

Available-for-sale fixed maturities at March 31, 2021 and December 31, 2020 included the following:


	March 31, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available-for-sale
U.S. Treasury obligations	$	101,045	$	2,088	$	256	$	102,877
U.S. Government-sponsored enterprise obligations	11,959		106		121		11,944
State and municipal bonds	312,809		11,196		1,540		322,465
Corporate debt	1,395,466		42,572		9,172		1,428,866
Residential mortgage-backed securities	268,344		5,727		2,523		271,548
Agency commercial mortgage-backed securities	13,196		537		15		13,718
Other commercial mortgage-backed securities	119,145		3,254		1,080		121,319
Other asset-backed securities	287,659		3,227		350		290,536
	$	2,509,623	$	68,707	$	15,057	$	2,563,273


	December 31, 2020
(In thousands)	Amortized Cost		Allowance for Expected Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available-for-sale
U.S. Treasury obligations	$	104,097	$	—	$	2,985	$	23	$	107,059
U.S. Government-sponsored enterprise obligations	12,103		—		158		—		12,261
State and municipal bonds	316,022		—		16,937		39		332,920
Corporate debt	1,267,992		552		63,204		1,302		1,329,342
Residential mortgage-backed securities	269,752		—		7,171		382		276,541
Agency commercial mortgage-backed securities	12,623		—		687		—		13,310
Other commercial mortgage-backed securities	109,244		—		4,788		940		113,092
Other asset-backed securities	269,742		—		4,006		742		273,006
	$	2,361,575	$	552	$	99,936	$	3,428	$	2,457,531

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at March 31, 2021, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


(In thousands)	Amortized Cost		Due in one year or less		Due after one year through five years		Due after five years through ten years		Due after ten years		Total Fair Value
Fixed maturities, available-for-sale
U.S. Treasury obligations	$	101,045	$	23,143	$	70,919	$	8,815	$	—	$	102,877
U.S. Government-sponsored enterprise obligations	11,959		3,870		5,044		2,887		143		11,944
State and municipal bonds	312,809		6,114		153,779		144,719		17,853		322,465
Corporate debt	1,395,466		140,572		755,625		481,431		51,238		1,428,866
Residential mortgage-backed securities	268,344										271,548
Agency commercial mortgage-backed securities	13,196										13,718
Other commercial mortgage-backed securities	119,145										121,319
Other asset-backed securities	287,659										290,536
	$	2,509,623									$	2,563,273

Excluding obligations of the U.S. Government, U.S. Government-sponsored enterprises and a U.S. Government obligations money market fund, no investment in any entity or its affiliates exceeded 10% of shareholders’ equity at March 31, 2021.

Cash and securities with a carrying value of $41.7 million at March 31, 2021 were on deposit with various state insurance departments to meet regulatory requirements.

As a member of Lloyd's, ProAssurance is required to maintain capital at Lloyd's, referred to as FAL, to support underwriting by Syndicate 1729 and Syndicate 6131. At March 31, 2021, ProAssurance's FAL investments were comprised of available-for-sale fixed maturities with a fair value of $102.8 million and cash and cash equivalents of $4.0 million on deposit with Lloyd's in order to satisfy these FAL requirements.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Investments Held in a Loss Position

The following tables provide summarized information with respect to investments held in an unrealized loss position at March 31, 2021 and December 31, 2020, including the length of time the investment had been held in a continuous unrealized loss position.


	March 31, 2021
	Total				Less than 12 months				12 months or longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss		Value		Loss
Fixed maturities, available-for-sale
U.S. Treasury obligations	$	26,250	$	256	$	26,250	$	256	$	—	$	—
U.S. Government-sponsored enterprise obligations	5,714		121		5,714		121		—		—
State and municipal bonds	67,604		1,540		67,604		1,540		—		—
Corporate debt	397,470		9,172		370,642		8,704		26,828		468
Residential mortgage-backed securities	105,643		2,523		99,580		2,253		6,063		270
Agency commercial mortgage-backed securities	1,276		15		1,276		15		—		—
Other commercial mortgage-backed securities	41,832		1,080		35,400		437		6,432		643
Other asset-backed securities	71,365		350		59,054		280		12,311		70
	$	717,154	$	15,057	$	665,520	$	13,606	$	51,634	$	1,451


	December 31, 2020
	Total				Less than 12 months				12 months or longer
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss		Value		Loss
Fixed maturities, available-for-sale
U.S. Treasury obligations	$	14,390	$	23	$	14,390	$	23	$	—	$	—

State and municipal bonds	6,416		39		6,416		39		—		—
Corporate debt	94,695		1,302		79,436		1,020		15,259		282
Residential mortgage-backed securities	34,928		382		34,509		381		419		1

Other commercial mortgage-backed securities	18,766		940		18,480		935		286		5
Other asset-backed securities	43,739		742		37,850		701		5,889		41
	$	212,934	$	3,428	$	191,081	$	3,099	$	21,853	$	329

As of March 31, 2021, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 784 debt securities (28.5% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 514 issuers. The greatest and second greatest unrealized loss positions among those securities were each approximately $0.5 million. The securities were evaluated for impairment as of March 31, 2021.

As of December 31, 2020, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 292 debt securities (11.1% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 229 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.4 million and $0.2 million, respectively. The securities were evaluated for impairment as of December 31, 2020.

Each quarter, ProAssurance performs a detailed analysis for the purpose of assessing whether any of the securities it holds in an unrealized loss position has suffered an impairment due to credit or non-credit factors. A detailed discussion of the factors considered in the assessment is included in Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Fixed maturity securities held in an unrealized loss position at March 31, 2021, excluding asset-backed securities, have paid all scheduled contractual payments and are expected to continue doing so. Expected future cash flows of asset-backed securities, excluding those issued by GNMA, FNMA and FHLMC, held in an unrealized loss position were estimated as part of the March 31, 2021 impairment evaluation using the most recently available six-month historical performance data for the collateral (loans) underlying the security or, if historical data was not available, sector based assumptions, and equaled or exceeded the current amortized cost basis of the security.

The following tables present a roll forward of the allowance for expected credit losses on available-for-sale fixed maturities for the three months ended March 31, 2021 and 2020.


	Three Months Ended March 31, 2021
(In thousands)	Corporate Debt		Total
Balance at December 31, 2020	$	552	$	552




Reductions related to:
Securities sold during the period	(552)		(552)



Balance at March 31, 2021	$	—	$	—


	Three Months Ended March 31, 2020
(In thousands)	Corporate Debt		Total
Balance at December 31, 2019	$	—	$	—
Additional credit losses related to securities for which:
No allowance for credit losses has been previously recognized	1,163		1,163







Balance at March 31, 2020	$	1,163	$	1,163

Other information regarding sales and purchases of fixed maturity available-for-sale securities is as follows:


	Three Months Ended March 31
(In millions)		2021		2020
Proceeds from sales (exclusive of maturities and paydowns)		$	61.9	$	64.9
Purchases		$	342.2	$	227.5

Equity Investments

ProAssurance's equity investments are carried at fair value with changes in fair value recognized in income as a component of net realized investment gains (losses) during the period of change. Equity investments on the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020 primarily included stocks, bond funds and investment funds.

Short-term Investments

ProAssurance's short-term investments, which have a maturity at purchase of one year or less, are primarily comprised of investments in U.S. treasury obligations, commercial paper and money market funds. Short-term investments are carried at fair value which approximates the cost of the securities due to their short-term nature.

BOLI

ProAssurance holds BOLI policies that are carried at the current cash surrender value of the policies (original cost $33 million). All insured individuals were members of ProAssurance management at the time the policies were acquired. The primary purpose of the program is to offset future employee benefit expenses through earnings on the cash value of the policies. ProAssurance is the owner and beneficiary of these policies.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Net Investment Income

Net investment income by investment category was as follows:


	Three Months Ended March 31
(In thousands)		2021		2020
Fixed maturities		$	15,692	$	18,285
Equities		694		1,909
Short-term investments, including Other		273		1,472
BOLI		444		456
Investment fees and expenses		(2,086)		(1,292)
Net investment income		$	15,017	$	20,830

Investment in Unconsolidated Subsidiaries

ProAssurance's investment in unconsolidated subsidiaries were as follows:


	March 31, 2021	Carrying Value
(In thousands)	Percentage Ownership	March 31, 2021		December 31, 2020
Qualified affordable housing project tax credit partnerships	See below	$	24,351	$	27,719

All other investments, primarily investment fund LPs/LLCs	See below	275,009		282,810
		$	299,360	$	310,529

Qualified affordable housing project tax credit partnership interests held by ProAssurance generate investment returns by providing tax benefits to fund investors in the form of tax credits and project operating losses. The carrying value of these investments reflects ProAssurance's total commitments (both funded and unfunded) to the partnerships, less any amortization. ProAssurance's ownership percentage relative to two of the tax credit partnership interests is almost 100%; these interests had a carrying value of $8.1 million at March 31, 2021 and $9.4 million at December 31, 2020. ProAssurance's ownership percentage relative to the remaining tax credit partnership interests is less than 20%; these interests had a carrying value of $16.3 million at March 31, 2021 and $18.3 million at December 31, 2020. Since ProAssurance has the ability to exert influence over the partnerships but does not control them, all are accounted for using the equity method. See further discussion of the entities in which ProAssurance holds passive interests in Note 12.

ProAssurance holds interests in investment fund LPs/LLCs and other equity method investments and LPs/LLCs which are not considered to be investment funds. ProAssurance's ownership percentage relative to four of the LPs/LLCs is greater than 25%, which is expected to be reduced as the funds mature and other investors participate in the funds; these investments had a carrying value of $47.0 million at March 31, 2021 and $46.2 million at December 31, 2020. ProAssurance's ownership percentage relative to the remaining investments and LPs/LLCs is less than 25%; these interests had a carrying value of $228.0 million at March 31, 2021 and $236.6 million at December 31, 2020. ProAssurance does not have the ability to exert control over any of these funds.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries included losses from qualified affordable housing project tax credit partnerships and a historic tax credit partnership. Investment results recorded reflect ProAssurance's allocable portion of partnership operating results. Tax credits reduce income tax expense in the period they are recognized. The results recorded and tax credits recognized related to ProAssurance's tax credit partnership investments were as follows:


	Three Months Ended March 31
(In thousands)		2021		2020
Qualified affordable housing project tax credit partnerships
Losses recorded		$	3,368	$	4,342
Tax credits recognized		$	3,324	$	4,369

Historic tax credit partnership*
Losses (gains) recorded		$	(182)	$	323
Tax credits recognized		$	50	$	103
* ProAssurance holds a historic tax credit partnership which was fully amortized in 2020. ProAssurance received a distribution associated with this investment during the three months ended March 31, 2021 as a result of positive cash flows from a project recognizing an operating gain. See further discussion on this investment in Note 3 of the Notes to the Consolidated Financial Statements in ProAssurance’s December 31, 2020 report on Form 10-K.

The tax credits generated from the Company's tax credit partnership investments of $3.4 million for the three months ended March 31, 2021 were deferred and are expected to be utilized in future periods.

Tax credits provided by the underlying projects of the Company's historic tax credit partnership are typically available in the tax year in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax credit partnerships are provided over approximately a ten year period.

Significant Equity Method Investee

As previously discussed, ProAssurance holds certain investments that are measured using the equity method of accounting, primarily investments in LPs/LLCs, which are carried as a part of Investment in Unconsolidated Subsidiaries on the Condensed Consolidated Balance Sheet. Each quarter, ProAssurance assesses the significance of its equity method investees. As of March 31, 2021, ProAssurance determined one equity method investee, NB Private Equity Credit Opportunities Fund LP, to be significant. This fund invests primarily in senior/junior debt instruments of private equity backed companies, including secured and unsecured loans, bonds and other instruments. The following table presents gross summarized financial information for this fund, including the portion not attributable to ProAssurance, derived from the fund's financial statements which are prepared in accordance with GAAP. As the majority of ProAssurance's equity method investments report their results to the Company on a one quarter lag, the summarized financial information below represents this fund's results for the three months ended December 31, 2020.


	Three Months Ended March 31, 2021
(In thousands)
Net investment income		$	40,636
Net realized investment gains (losses)		14,587
Net change in unrealized appreciation (depreciation)		61,777
Net gain (loss)		$	117,000

Net gain (loss) attributable to ProAssurance*		$	2,056
*Represents ProAssurance's share of the fund's aggregate income or loss, which is included as a component of equity in earnings (loss) of unconsolidated subsidiaries in its Condensed Consolidated Statement of Income and Comprehensive Income for the three months ended March 31, 2021.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

Net Realized Investment Gains (Losses)

Realized investment gains and losses are recognized on the first-in, first-out basis. The following table provides detailed information regarding net realized investment gains (losses):


	Three Months Ended March 31
(In thousands)		2021		2020
Total impairment losses:


Corporate debt		$	—	$	(1,817)


Portion of impairment losses recognized in other comprehensive income before taxes:

Corporate debt		—		654


Net impairment losses recognized in earnings		—		(1,163)
Gross realized gains, available-for-sale fixed maturities		4,294		2,427
Gross realized (losses), available-for-sale fixed maturities		(187)		(1,403)

Net realized gains (losses), trading fixed maturities		72		103
Net realized gains (losses), equity investments		4,189		15,190
Net realized gains (losses), other investments		3,196		48
Change in unrealized holding gains (losses), trading fixed maturities		(214)		(118)
Change in unrealized holding gains (losses), equity investments		(2,937)		(38,477)
Change in unrealized holding gains (losses), convertible securities, carried at fair value		(190)		(5,273)

Other		626		(7)
Net realized investment gains (losses)		$	8,849	$	(28,673)

For the three months ended March 31, 2021, ProAssurance did not recognize any credit-related impairment losses in earnings or non-credit impairment losses in OCI. For the three months ended March 31, 2020, ProAssurance recognized credit-related impairment losses in earnings of $1.2 million and non-credit impairment losses in OCI of $0.7 million. The credit-related impairment losses related to four corporate bonds in the energy, consumer and entertainment sectors. The non-credit related impairment losses related to three corporate bonds in the energy and consumer sectors.

ProAssurance recognized $8.8 million of net realized investment gains during the three months ended March 31, 2021, driven primarily by realized gains on the sale of available-for-sale fixed maturities and equity investments. ProAssurance recognized $28.7 million of net realized investment losses during the three months ended March 31, 2020 driven by the impact of decreases in fair value on its equity portfolio of $38.5 million and convertible securities of $5.3 million attributable to disruptions in the global financial markets related to COVID-19 during the first quarter of 2020.

The following table presents a roll forward of cumulative credit losses recorded in earnings related to impaired debt securities for which a portion of the impairment was recorded in OCI.


	Three Months Ended March 31
(In thousands)		2021		2020
Balance beginning of period		$	552	$	470
Additional credit losses recognized during the period, related to securities for which:
No impairment has been previously recognized		—		1,064

Reductions due to:
Securities sold during the period (realized)		(552)		—

Balance March 31		$	—	$	1,534

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

4. Retroactive Insurance Contracts

ProAssurance offers custom alternative risk solutions which includes assumed reinsurance. In the first quarter of 2021, ProAssurance entered into an assumed reinsurance arrangement with a regional hospital group. As the contract included both prospective coverage and retroactive coverage, ProAssurance bifurcated the provisions of the contract and accounted for each component separately. As of the contract effective date, ProAssurance recognized total net premiums written of $4.5 million, comprised of $2.2 million of prospective coverage and $2.3 million of retroactive coverage, total net premiums earned of $3.0 million, comprised of $0.7 million of prospective coverage and $2.3 million of retroactive coverage and total net losses and loss adjustment expenses of $2.9 million in the Condensed Consolidated Statement of Income and Comprehensive Income for the three months ended March 31, 2021. For additional information regarding ProAssurance's accounting policy for retroactive insurance contracts, see Note 1 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K.

5. Income Taxes

For interim periods, ProAssurance generally utilizes the estimated annual effective tax rate method under which the Company determines its provision (benefit) for income taxes based on the current estimate of its annual effective tax rate. Under the estimated annual effective tax rate method, items which are unusual, infrequent, or that cannot be reliably estimated are considered in the effective tax rate in the period in which the item is included in income, and are referred to as discrete items. The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes primarily because ProAssurance recognizes tax credit benefits transferred from tax credit partnership investments. In calculating the Company's year-to-date income tax expense (benefit), the Company includes the estimated benefit of tax credits for the year-to-date period based on the most recently available information provided by the tax credit partnerships; the actual amounts of credits provided by the tax credit partnerships may prove to be different than the Company's estimates. The effect of such a difference is recognized in the period identified.

ProAssurance had a receivable for U.S. federal and U.K. income taxes carried as a part of other assets of $6.6 million at March 31, 2021 and $18.9 million at December 31, 2020. The liability for unrecognized tax benefits, which is included in the total receivable for U.S. federal and U.K. income taxes, was $5.8 million and $5.7 million at March 31, 2021 and December 31, 2020, respectively, which included an accrued liability for interest of approximately $0.6 million and $0.5 million, respectively.

Coronavirus Aid, Relief and Economic Security Act

In response to COVID-19, the CARES Act was signed into law on March 27, 2020 and contains several provisions for corporations and eases certain deduction limitations originally imposed by the TCJA. See further discussion in Note 5 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K. As a result of the CARES Act, ProAssurance now has the ability to carryback NOLs generated in tax years 2018, 2019 and 2020 for up to five years. The Company has an NOL of approximately $45.3 million from the 2020 tax year that will be carried back to the 2015 tax year and is expected to generate a tax refund of approximately $15.9 million. Additionally, the Company had an NOL of approximately $25.6 million from the 2019 tax year which was carried back to the 2014 tax year and generated a tax refund of approximately $9.0 million which the Company received in February 2021.

American Rescue Plan Act of 2021

In response to economic concerns associated with COVID-19, the American Rescue Plan Act of 2021 was signed into law on March 11, 2021 and includes an expansion of the number of employees covered by the limitation on the deductibility of compensation in excess of $1 million. This provision is effective for tax years beginning after December 31, 2026. The Company has evaluated this provision as well as the other provisions of the American Rescue Plan Act of 2021 and concluded that they will not have a material impact on ProAssurance's financial position or results of operations as of March 31, 2021.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

6. Goodwill

Goodwill is recognized in conjunction with business acquisitions as the excess of the purchase consideration for the business acquisition over the fair value of identifiable assets acquired and liabilities assumed. The fair value of identifiable assets and liabilities, and thus goodwill, is subject to redetermination within a measurement period of up to one year following completion of a business acquisition.

Goodwill is tested for impairment annually or more frequently if circumstances indicate an impairment may have occurred. The date of the Company's annual goodwill impairment test is October 1. Impairment of goodwill is tested at the reporting unit level, which is consistent with the Company's reportable segments identified in Note 14. 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 tests goodwill for impairment.

Of the Company's five reporting units, two have net goodwill: Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance. The table below presents the carrying amount of goodwill and accumulated impairment losses by reporting unit at March 31, 2021 and December 31, 2020:


	Reporting Unit
(In thousands)	Specialty P&C		Workers' Compensation Insurance		Segregated Portfolio Cell Reinsurance		Total
Goodwill, gross as of January 1, 2020	$	161,115	$	44,110	$	5,500	$	210,725
Accumulated impairment losses*	(161,115)		—		—		(161,115)
Goodwill, net as of December 31, 2020	—		44,110		5,500		49,610
Accumulated impairment losses	—		—		—		—
Goodwill, net as of March 31, 2021	$	—	$	44,110	$	5,500	$	49,610

*Accumulated impairment losses in 2020 represent the pre-tax impairment loss of $161.1 million recognized during the third quarter of 2020 in relation to the Specialty P&C reporting unit. There were no other impairment losses taken prior to 2020. For additional information regarding ProAssurance's goodwill impairment in 2020, see Note 1 and Note 6 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

7. Reserve for Losses and Loss Adjustment Expenses

The reserve for losses is established based on estimates of individual claims and actuarially determined estimates of future losses based on ProAssurance’s past loss experience, available industry data and projections as to future claims frequency, severity, inflationary trends and settlement patterns. Estimating the reserve, particularly the reserve appropriate for liability exposures, is a complex process. For a high proportion of the risks insured or reinsured by ProAssurance, claims may be resolved over an extended period of time, often five years or more, and may be subject to litigation. Estimating losses requires ProAssurance to make and revise judgments and assessments regarding multiple uncertainties over an extended period of time. As a result, the reserve estimate may vary considerably from the eventual outcome. The assumptions used in establishing ProAssurance’s reserve are regularly reviewed and updated by management as new data becomes available. Changes to estimates of previously established reserves are included in earnings in the period in which the estimate is changed.

ProAssurance believes that the methods it uses to establish reserves are reasonable and appropriate. Each year, ProAssurance uses internal actuaries to review the reserve for losses of each insurance subsidiary. ProAssurance also engages consulting actuaries to review ProAssurance claims data and provide observations regarding cost trends, rate adequacy and ultimate loss costs. The statutory filings of each insurance company with the insurance regulators must be accompanied by a consulting actuary's certification as to their respective reserves. ProAssurance considers the views of the actuaries as well as other factors, such as premium rates, historical paid and incurred loss development trends, and an evaluation of the current loss environment including frequency, severity, the expected effect of inflation, general economic and social trends, and the legal and political environment in establishing the amount of its reserve for losses. The Company expects there will be impacts to these factors as well as to the timing of loss emergence and ultimate loss ratios for certain coverages it underwrites as a result of COVID-19 and the related economic shutdown; however, the extent to which COVID-19 impacts these factors is highly uncertain and cannot be predicted (see "Item 1A, Risk Factors" and Note 8 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K for additional information). The industry is experiencing new conditions, including the postponement of court cases, changes in settlement trends and a significant reduction in economic activity and insured exposure in some classes. ProAssurance's booked reserves as of March 31, 2021 include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in significant changes to the Company's reserve estimates in future periods.

ProAssurance partitions its reserve by accident year, which is the year in which the claim becomes its liability. For claims-made policies, the insured event generally becomes a liability when the event is first reported to the Company. For occurrence policies, the insured event becomes a liability when the event takes place. For retroactive coverages, the insured event becomes a liability at inception of the underlying contract. As claims are incurred (reported) and claim payments are made, they are aggregated by accident year for analysis purposes. ProAssurance also partitions its reserve by reserve type: case reserves and IBNR reserves. Case reserves are established by the claims department based upon the particular circumstances of each reported claim and represent ProAssurance’s estimate of the future loss costs (often referred to as expected losses) that will be paid on reported claims. Case reserves are decremented as claim payments are made and are periodically adjusted upward or downward as estimates regarding the amount of future losses are revised; a reported loss for an individual claim equates to the case reserve at any point in time plus the claim payments that have been made to date. IBNR reserves represent an estimate, in the aggregate, of future development on losses that have been reported to ProAssurance plus an estimate of losses that have been incurred but not reported.

Development of Prior Accident Years

In addition to setting the initial reserve for the current accident year, each period ProAssurance reassesses the amount of reserve required for prior accident years. The foundation of ProAssurance’s reserve re-estimation process is an actuarial analysis that is performed by both the internal and consulting actuaries. This detailed analysis projects ultimate losses based on partitions which include line of business, geography, coverage layer and accident year. The procedure uses the most representative data for each partition, capturing its unique patterns of development and trends. ProAssurance believes that the use of consulting actuaries provides an independent view of the loss data as well as a broader perspective on industry loss trends.

Table of Contents

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

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


(In thousands)	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020		Year Ended December 31, 2020
Balance, beginning of year	$	2,417,179	$	2,346,526	$	2,346,526
Less reinsurance recoverables on unpaid losses and loss adjustment expenses	385,087		390,708		390,708
Net balance, beginning of year	2,032,092		1,955,818		1,955,818

Net losses:
Current year(1)(2)(3)	154,634		170,874		711,846
Favorable development of reserves established in prior years, net	(4,849)		(6,042)		(50,399)
Total	149,785		164,832		661,447
Paid related to:
Current year	(10,513)		(15,876)		(83,204)
Prior years	(126,534)		(163,518)		(501,969)
Total paid	(137,047)		(179,394)		(585,173)
Net balance, end of period	2,044,830		1,941,256		2,032,092
Plus reinsurance recoverables on unpaid losses and loss adjustment expenses	393,420		389,792		385,087
Balance, end of period	$	2,438,250	$	2,331,048	$	2,417,179

(1) Current year net losses for the year ended December 31, 2020 included $9.2 million of amortization of a PDR which offsets the impact of the losses incurred associated with the premium earned related to a large national healthcare account's claims-made policy in the Specialty P&C segment. For additional information regarding the PDR, see Note 7 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K.

(2) During the second quarter of 2020, the aforementioned large national healthcare account did not renew on terms offered by the Company and exercised its contractual option to purchase extended reporting endorsement or "tail" coverage. As a result, ProAssurance recognized total current year losses of $60.0 million (assumes a full limit loss) within the Specialty P&C segment for the year ended December 31, 2020 (see Note 7 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K).

(3) Current year net losses for the three months ended March 31, 2021 included incurred losses of $2.9 million related to an assumed reinsurance arrangement entered into during the first quarter of 2021 in the Specialty P&C segment (see Note 4).

Estimating liability reserves is complex and requires the use of many assumptions. As time passes and ultimate losses for prior years are either known or become subject to a more precise estimation, ProAssurance increases or decreases the reserve estimates established in prior periods. The consolidated net favorable loss development recognized in the three months ended March 31, 2021 primarily reflected a lower than anticipated claims severity trend (i.e., the average size of a claim) in the Specialty P&C segment, primarily related to the 2017 and 2018 accident years. The net favorable development also reflected overall favorable trends in claim closing patterns in the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments. The net favorable loss development recognized in the Workers' Compensation Insurance segment is primarily related to the 2017 accident year and prior. The net favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment is primarily related to the 2018 and 2019 accident years. Consolidated net favorable loss development recognized in the three months ended March 31, 2021 was partially offset by unfavorable reserve development recognized in the Lloyd's Syndicates segment driven by certain property and catastrophe related losses.

The net favorable loss development recognized during the three months ended March 31, 2020 primarily reflected overall favorable trends in claim closing patterns in the Segregated Portfolio Cell Reinsurance and Workers' Compensation Insurance segments as well as a reduction in the reserve for potential ECO/XPL claims in the Specialty P&C segment. The net favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment primarily related to the 2016 through 2018 accident years and the net favorable loss development recognized in the Workers' Compensation Insurance segment primarily related to the 2015 and 2016 accident years.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

The net favorable loss development recognized for the year ended December 31, 2020 primarily reflected a lower than anticipated claims severity trend (i.e., the average size of a claim) in the Specialty P&C segment, primarily related to the 2014 through 2017 accident years. The net favorable development also reflected overall favorable trends in claim closing patterns in the Segregated Portfolio Cell Reinsurance and Workers' Compensation Insurance segments. The net favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment primarily related to the 2014 through 2019 accident years and the net favorable loss development recognized in the Workers' Compensation Insurance segment primarily related to the 2014 through 2017 accident years.

For additional information regarding ProAssurance's reserve for losses, see Note 1 and Note 8 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K.

8. Commitments and Contingencies

ProAssurance is involved in various legal actions related to insurance policies and claims handling including, but not limited to, claims asserted by policyholders. These types of legal actions arise in the Company's ordinary course of business and, in accordance with GAAP for insurance entities, are considered as a part of the Company's loss reserving process, which is described in detail under the heading "Losses and Loss Adjustment Expenses" in the Accounting Policies section in Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 Form 10-K. ProAssurance also has other direct actions against the Company unrelated to its claims activity which are evaluated and accounted for as a part of other liabilities. For these corporate legal actions, the Company evaluates each case separately and establishes what it believes is an appropriate reserve based on GAAP guidance related to contingent liabilities. As of March 31, 2021 there were no material reserves established for corporate legal actions.

As a member of Lloyd's, ProAssurance has obligations to Syndicate 1729 and Syndicate 6131 including a Syndicate Credit Agreement and FAL requirements. The Syndicate Credit Agreement is an unconditional revolving credit agreement to the Premium Trust Fund of Syndicate 1729 for the purpose of providing working capital with maximum permitted borrowings of £30.0 million (approximately $41.3 million as of March 31, 2021). The Syndicate Credit Agreement has a maturity date of December 31, 2021 and contains an annual auto-renewal feature which allows for ProAssurance to elect to non-renew if notice is given at least 30 days prior to the next auto-renewal date, which is one year prior to the maturity date. Under the Syndicate Credit Agreement, advances bear interest at 3.8% annually and may be repaid at any time but are repayable upon demand after December 31, 2021, subject to extension through the auto-renewal feature. As of March 31, 2021, there were no outstanding borrowings under the Syndicate Credit Agreement. ProAssurance provides FAL to support underwriting by Syndicate 1729 and Syndicate 6131 and is comprised of investment securities and cash and cash equivalents deposited with Lloyd's with a total fair value of approximately $106.8 million at March 31, 2021 (see Note 3).

ProAssurance has entered into financial instrument transactions that may present off-balance sheet credit risk or market risk. These transactions include a short-term loan commitment and commitments to provide funding to non-public investment entities. Under the short-term loan commitment, ProAssurance has agreed to advance funds on a 30 day basis to a counterparty provided there is no violation of any condition established in the contract. As of March 31, 2021, ProAssurance had total funding commitments related to non-public investment entities as well as the short-term loan commitment of approximately $190.5 million which included the amount at risk if the full short-term loan is extended and the counterparties default. However, the credit risk associated with the short-term loan commitment is minimal as the counterparties to the contract are highly rated commercial institutions and to-date have been performing in accordance with their contractual obligations. ProAssurance’s expected credit losses associated with this short-term loan commitment were nominal in amount as of March 31, 2021.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

9. Leases

ProAssurance is involved in a number of operating leases primarily for office facilities. Office facility leases have remaining lease terms ranging from one year to eleven years; some of which include options to extend the leases for up to fifteen years, and some of which include an option to terminate the lease within one year. ProAssurance subleases certain office facilities to third parties and classifies these leases as operating leases.

The following table provides a summary of the components of net lease expense as well as the reporting location in the Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2021 and 2020.


(In thousands)	Location in the Condensed Consolidated Statements of Income and Comprehensive Income	Three Months Ended March 31
			2021		2020
Operating lease expense (1)	Operating expense		$	938	$	1,625
Sublease income (2)	Other income		(54)		(38)
Net lease expense			$	884	$	1,587

(1) Includes short-term lease costs and variable lease costs, if applicable. For the three months ended March 31, 2021 and 2020, no short-term lease costs were recognized and variable lease costs were nominal in amount.

(2) Sublease income excludes rental income from owned properties of $0.6 million during each of the three months ended March 31, 2021 and 2020 which is included in other income. See “Item 2. Properties” in ProAssurance's December 31, 2020 report on Form 10-K for a listing of currently owned properties.

The following table provides supplemental lease information for operating leases on the Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020.


($ in thousands)	March 31, 2021			December 31, 2020
Operating lease ROU assets	$	18,219		$	19,013
Operating lease liabilities	$	19,168		$	20,116
Weighted-average remaining lease term	8.26 years			8.31 years
Weighted-average discount rate	2.98		%	2.97		%

The following table provides supplemental lease information for the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020.


	Three Months Ended March 31
(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,089	$	1,017

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

The following table is a schedule of remaining future minimum lease payments for operating leases that had an initial or remaining non-cancellable lease term in excess of one year as of March 31, 2021.


(In thousands)
2021	$	3,057
2022	3,306
2023	2,608
2024	2,026
2025	1,783
Thereafter	8,875
Total future minimum lease payments	21,655
Less: Imputed interest	2,487
Total operating lease liabilities	$	19,168

10. Debt

ProAssurance’s outstanding debt consisted of the following:


($ in thousands)	March 31, 2021		December 31, 2020
Senior Notes due 2023, unsecured, interest at 5.3% annually	$	250,000	$	250,000

Mortgage Loans, outstanding borrowings are secured by first priority liens on two office buildings, and bear an interest rate of three-month LIBOR plus 1.325% (1.51% and 1.58%, respectively) determined on a quarterly basis	35,723		36,113
Total principal	285,723		286,113
Less unamortized debt issuance costs	1,301		1,400
Debt less unamortized debt issuance costs	$	284,422	$	284,713

Revolving Credit Agreement

ProAssurance has a Revolving Credit Agreement, which expires November 2024, that may be used for general corporate purposes, including, but not limited to, short-term working capital, share repurchases as authorized by the Board and support for other activities. ProAssurance's Revolving Credit Agreement permits borrowings up to $250 million, and has available a $50 million accordion feature which, if successfully subscribed, would expand the permitted borrowings to a maximum of $300 million. As of March 31, 2021 and December 31, 2020, there were no outstanding borrowings on the Revolving Credit Agreement.

Covenant Compliance

There are no financial covenants associated with the Senior Notes due 2023.

The Revolving Credit Agreement contains customary representations, covenants and events constituting default, and remedies for default. The Revolving Credit Agreement also defines financial covenants regarding permitted leverage ratios. ProAssurance is currently in compliance with all covenants of the Revolving Credit Agreement. On April 19, 2021, ProAssurance amended and restated its Revolving Credit Agreement to allow for additional indebtedness of a subsidiary in preparation of the close of the NORCAL acquisition. This amendment to the Revolving Credit Agreement is included as Exhibit 10.1 of this report.

The Mortgage Loans contain customary representations, covenants and events constituting default, and remedies for default. The Mortgage Loans also define a financial covenant regarding a permitted leverage ratio for each of the two ProAssurance subsidiaries that entered into the Mortgage Loans. ProAssurance's subsidiaries are currently in compliance with the financial covenant of the Mortgage Loans.

Additional Information

For additional information regarding ProAssurance's debt, see Note 11 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

11. Shareholders’ Equity

At March 31, 2021 and December 31, 2020, ProAssurance had 100 million shares of authorized common stock and 50 million shares of authorized preferred stock. The Board has the authority to determine provisions for the issuance of preferred shares, including the number of shares to be issued, the designations, powers, preferences and rights, and the qualifications, limitations or restrictions of such shares.

ProAssurance declared cash dividends of $0.05 and $0.31 per share during the first quarter of 2021 and 2020, respectively. Dividends declared during the 2021 and 2020 three-month periods totaled $2.7 million and $16.7 million, respectively. Any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of financial performance, future expectations and other factors deemed relevant by the Board. See Note 12 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K for additional information.

At March 31, 2021, Board authorizations for the repurchase of common shares or the retirement of outstanding debt of $110 million remained available for use. ProAssurance did not repurchase any common shares during the three months ended March 31, 2021 or 2020.

Other Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

The following tables provide a detailed breakout of the components of AOCI and the amounts reclassified from AOCI to net income (loss). The tax effects of all amounts in the tables below, except for an immaterial amount of unrealized gains and losses on available-for-sale securities held at the Company's U.K. subsidiary, were computed using the enacted U.S. federal corporate tax rate of 21%. For the three months ended March 31, 2021 and 2020, OCI included a deferred tax benefit of $8.3 million and $11.0 million, respectively.

The changes in the balance of each component of AOCI for the three months ended March 31, 2021 and 2020 were as follows:


(In thousands)	Unrealized Investment Gains (Losses)		Non-credit Impairments		Unrecognized Change in Defined Benefit Plan Liabilities*		Accumulated Other Comprehensive Income (Loss)
Balance December 31, 2020	$	75,388	$	(57)	$	(104)	$	75,227
OCI, before reclassifications, net of tax	(30,415)		—		—		(30,415)
Amounts reclassified from AOCI, net of tax	(3,347)		57		—		(3,290)
Net OCI, current period	(33,762)		57		—		(33,705)
Balance March 31, 2021	$	41,626	$	—	$	(104)	$	41,522


(In thousands)	Unrealized Investment Gains (Losses)		Non-credit Impairments		Unrecognized Change in Defined Benefit Plan Liabilities*		Accumulated Other Comprehensive Income (Loss)
Balance December 31, 2019	$	36,577	$	300	$	78	$	36,955
OCI, before reclassifications, net of tax	(42,497)		517		—		(41,980)
Amounts reclassified from AOCI, net of tax	115		—		—		115
Net OCI, current period	(42,382)		517		—		(41,865)
Balance March 31, 2020	$	(5,805)	$	817	$	78	$	(4,910)
* Represents the re-estimation of the defined benefit plan liability assumed in the Eastern acquisition. The defined benefit plan is frozen as to the earnings of additional benefits and the benefit plan liability is re-estimated annually.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

12. Variable Interest Entities

ProAssurance holds passive interests in a number of entities that are considered to be VIEs under GAAP guidance. ProAssurance's VIE interests principally consist of interests in LPs/LLCs formed for the purpose of achieving diversified equity and debt returns. ProAssurance's VIE interests, carried as a part of investment in unconsolidated subsidiaries, totaled $270.8 million at March 31, 2021 and $282.2 million at December 31, 2020.

ProAssurance does not have power over the activities that most significantly impact the economic performance of these VIEs and thus is not the primary beneficiary. Investments in entities where ProAssurance holds a greater than minor interest but does not hold a controlling interest are accounted for using the equity method. Therefore, ProAssurance has not consolidated these VIEs. ProAssurance’s involvement with each VIE is limited to its direct ownership interest in the VIE. Except for the funding commitments disclosed in Note 8, ProAssurance has no arrangements with any of the VIEs to provide other financial support to or on behalf of the VIE. At March 31, 2021, ProAssurance’s maximum loss exposure relative to these investments was limited to the carrying value of ProAssurance’s investment in the VIE.

13. Earnings (Loss) Per Share

Diluted weighted average shares is calculated as basic weighted average shares plus the effect, calculated using the treasury stock method, of assuming that restricted share units and performance share units have vested. The following table provides a reconciliation between the Company's basic weighted average number of common shares outstanding to its diluted weighted average number of common shares outstanding:


(In thousands, except per share data)	Three Months Ended March 31
		2021		2020
Weighted average number of common shares outstanding, basic		53,918		53,808
Dilutive effect of securities:
Restricted Share Units		76		74
Performance Share Units		4		3


Weighted average number of common shares outstanding, diluted		53,998		53,885
Effect of dilutive shares on earnings (loss) per share		$	—	$	—

Dilutive common share equivalents are reflected in the earnings (loss) per share calculation while antidilutive common share equivalents are not reflected in the earnings (loss) per share calculation. There were no antidilutive common share equivalents for the three months ended March 31, 2021. For the three months ended March 31, 2020, all incremental common share equivalents were not included in the computation of diluted earnings (loss) per share because to do so would have been antidilutive for the period.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

14. Segment Information

ProAssurance's segments are based on the Company's internal management reporting structure for which financial results are regularly evaluated by the Company's CODM to determine resource allocation and assess operating performance. The Company continually assesses its internal management reporting structure and information evaluated by its CODM to determine whether any changes have occurred that would impact its segment reporting structure. The Company operates in five segments that are organized around the nature of the products and services provided: Specialty P&C, Workers' Compensation Insurance, Segregated Portfolio Cell Reinsurance, Lloyd's Syndicates and Corporate. A description of each of ProAssurance's five operating and reportable segments follows.

Specialty P&C includes professional liability insurance and medical technology liability insurance. Professional liability insurance is primarily comprised of medical professional liability products offered to healthcare providers and institutions. The Company also offers, to a lesser extent, professional liability insurance to attorneys and their firms. Medical technology liability insurance is offered to medical technology and life sciences companies that manufacture or distribute products including entities conducting human clinical trials. In addition, the Company also offers custom alternative risk solutions including loss portfolio transfers, assumed reinsurance and captive cell programs for healthcare professional liability insureds. For the alternative market captive cell programs, the Specialty P&C segment cedes either all or a portion of the premium to certain SPCs in the Company's Segregated Portfolio Cell Reinsurance segment.

Workers' Compensation Insurance includes workers' compensation insurance products which are provided primarily to employers with 1,000 or fewer employees. The segment's products include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market program premiums include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market program premiums are 100% ceded to either SPCs in the Company's Segregated Portfolio Cell Reinsurance segment or, to a limited extent, to a captive insurer unaffiliated with ProAssurance.

Segregated Portfolio Cell Reinsurance includes the results (underwriting profit or loss, plus investment results, net of U.S. federal income taxes) of SPCs at Inova Re and Eastern Re, the Company's Cayman Islands SPC operations. Each SPC is owned, fully or in part, by an agency, group or association, and the results of the SPCs are attributable to the participants of that cell. ProAssurance participates to a varying degree in the results of selected SPCs. SPC results attributable to external cell participants are reflected as SPC dividend expense (income) in the Segregated Portfolio Cell Reinsurance segment and in ProAssurance's Condensed Consolidated Statements of Income and Comprehensive Income. In addition, the Segregated Portfolio Cell Reinsurance segment includes the investment results of the SPCs as the investments are solely for the benefit of the cell participants, and investment results attributable to external cell participants are reflected in SPC dividend expense (income). The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from the Company's Workers' Compensation Insurance and Specialty P&C segments.

Lloyd's Syndicates includes the results from ProAssurance's participation in Lloyd's of London Syndicate 1729 and Syndicate 6131. The results of this segment are normally reported on a quarter lag, except when information is available that is material to the current period. Furthermore, investment results associated with the majority of investment assets solely allocated to Lloyd's Syndicate operations and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame. Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S. and international markets while Syndicate 6131 focuses on contingency and specialty property business, also within the U.S. and international markets. To support and grow the Company's core insurance operations, ProAssurance decreased its participation in the results of Syndicate 1729 for the 2021 underwriting year to 5% from 29%. Syndicate 6131 is an SPA that underwrites on a quota share basis with Syndicate 1729. Effective July 1, 2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an unaffiliated insurer. Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and the Company decreased its participation in the results of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due to the quarter lag, the change in the Company's participation in the results of Syndicates 1729 and 6131 will not be reflected in its results until the second quarter of 2021.

Corporate includes ProAssurance's investment operations, other than those reported in the Company's Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The segment also includes non-premium revenues generated outside of the Company's insurance entities and corporate expenses.

The accounting policies of the segments are described in Note 1 of the Notes to Consolidated Financial Statements in ProAssurance’s December 31, 2020 report on Form 10-K. ProAssurance evaluates the performance of its Specialty P&C and Workers' Compensation Insurance segments based on before tax underwriting profit or loss. ProAssurance evaluates the performance of its Segregated Portfolio Cell Reinsurance segment based on operating profit or loss, which includes investment

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

results of investment assets solely allocated to SPC operations, net of U.S. federal income taxes. Performance of the Lloyd's Syndicates segment is evaluated based on operating profit or loss, which includes investment results of investment assets solely allocated to Lloyd's Syndicate operations, net of U.K. income tax expense. Performance of the Corporate segment is evaluated based on the contribution made to consolidated after-tax results. ProAssurance accounts for inter-segment transactions as if the transactions were to third parties at current market prices. Assets are not allocated to segments because investments, other than the investments discussed above that are solely allocated to the Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, and other assets are not managed at the segment level. The tabular information that follows shows the financial results of the Company's reportable segments reconciled to results reflected in the Condensed Consolidated Statements of Income and Comprehensive Income. ProAssurance does not consider asset impairments, including goodwill and intangible asset impairments, in assessing the financial performance of its operating and reportable segments, and thus are included in the reconciliation of segment results to consolidated results.

Financial results by segment were as follows:


	Three Months Ended March 31, 2021
(In thousands)	Specialty P&C		Workers' Compensation Insurance		Segregated Portfolio Cell Reinsurance		Lloyd's Syndicates		Corporate		Inter-segment Eliminations		Consolidated
Net premiums earned	$	115,613	$	40,011	$	15,884	$	15,850	$	—	$	—	$	187,358
Net investment income	—		—		221		729		14,067		—		15,017
Equity in earnings (loss) of unconsolidated subsidiaries	—		—		—		—		6,788		—		6,788
Net realized gains (losses)	—		—		987		(115)		7,977		—		8,849
Other income (expense)(1)	469		392		1		221		1,894		(972)		2,005
Net losses and loss adjustment expenses	(101,186)		(26,207)		(9,425)		(12,967)		—		—		(149,785)
Underwriting, policy acquisition and operating expenses(1)	(26,346)		(12,286)		(5,025)		(6,591)		(7,175)		972		(56,451)
SPC U.S. federal income tax expense(2)	—		—		(356)		—		—		—		(356)
SPC dividend (expense) income	—		—		(1,742)		—		—		—		(1,742)
Interest expense	—		—		—		—		(3,212)		—		(3,212)
Income tax benefit (expense)	—		—		—		—		(736)		—		(736)
Segment results	$	(11,450)	$	1,910	$	545	$	(2,873)	$	19,603	$	—	7,735





Net income (loss)													$	7,735
Significant non-cash items:

Depreciation and amortization, net of accretion	$	2,171	$	903	$	316	$	15	$	3,317	$	—	$	6,722

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021


	Three Months Ended March 31, 2020
(In thousands)	Specialty P&C		Workers' Compensation Insurance		Segregated Portfolio Cell Reinsurance		Lloyd's Syndicates		Corporate		Inter-segment Eliminations		Consolidated
Net premiums earned	$	120,359	$	44,515	$	16,980	$	22,001	$	—	$	—	$	203,855
Net investment income	—		—		254		1,159		19,417		—		20,830
Equity in earnings (loss) of unconsolidated subsidiaries	—		—		—		—		(1,562)		—		(1,562)
Net realized gains (losses)	—		—		(3,207)		81		(25,547)		—		(28,673)
Other income (expense)(1)	1,698		757		136		(232)		633		(741)		2,251
Net losses and loss adjustment expenses	(110,931)		(29,769)		(9,352)		(14,780)		—		—		(164,832)
Underwriting, policy acquisition and operating expenses(1)	(29,585)		(14,164)		(5,079)		(9,142)		(4,827)		741		(62,056)
SPC U.S. federal income tax expense(2)	—		—		(222)		—		—		—		(222)
SPC dividend (expense) income	—		—		508		—		—		—		508
Interest expense	—		—		—		—		(4,129)		—		(4,129)
Income tax benefit (expense)	—		—		—		29		12,047		—		12,076
Segment results	$	(18,459)	$	1,339	$	18	$	(884)	$	(3,968)	$	—	(21,954)

Net income (loss)													$	(21,954)
Significant non-cash items:
Depreciation and amortization, net of accretion	$	1,580	$	926	$	69	$	9	$	2,150	$	—	$	4,734

(1) Certain fees for services provided to the SPCs at Inova Re and Eastern Re are recorded as expenses within the Segregated Portfolio Cell Reinsurance segment and as other income within the Workers' Compensation Insurance segment. These fees are primarily SPC rental fees and are eliminated between segments in consolidation.
(2) Represents the provision for U.S. federal income taxes for SPCs at Inova Re, which have elected to be taxed as a U.S. corporation under Section 953(d) of the Internal Revenue Code. U.S. federal income taxes are included in the total SPC net results and are paid by the individual SPCs.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

The following table provides detailed information regarding ProAssurance's gross premiums earned by product as well as a reconciliation to net premiums earned. All gross premiums earned are from external customers except as noted. ProAssurance's insured risks are primarily within the U.S.


	Three Months Ended March 31
(In thousands)		2021		2020
Specialty P&C Segment
Gross premiums earned:
HCPL		$	97,045	$	103,467
Small Business Unit		25,925		26,650
Medical Technology Liability		8,938		8,529
Other		152		377
Ceded premiums earned		(16,447)		(18,664)
Segment net premiums earned		115,613		120,359

Workers' Compensation Insurance Segment
Gross premiums earned:

Traditional business		41,743		47,485
Alternative market business		16,889		18,128
Ceded premiums earned		(18,621)		(21,098)
Segment net premiums earned		40,011		44,515

Segregated Portfolio Cell Reinsurance Segment
Gross premiums earned:
Workers' compensation(1)		16,115		17,513
HCPL(2)		1,852		1,677

Ceded premiums earned		(2,083)		(2,210)
Segment net premiums earned		15,884		16,980

Lloyd's Syndicates Segment
Gross premiums earned:
Property and casualty		20,385		28,196
Ceded premiums earned		(4,535)		(6,195)
Segment net premiums earned		15,850		22,001

Consolidated net premiums earned		$	187,358	$	203,855

(1) Premium for all periods is assumed from the Workers' Compensation Insurance segment.

(2) Premium for all periods is assumed from the Specialty P&C segment.

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ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

15. Subsequent Event

On May 5, 2021, ProAssurance completed its acquisition of NORCAL by purchasing over 98% of the converted company stock in exchange for base consideration of $441 million, which includes cash from ProAssurance of $248 million. The cash consideration from ProAssurance was funded by cash on hand as of May 5, 2021. On May 6, 2021, ProAssurance borrowed $15 million under its Revolving Credit Agreement to pay certain transaction-related expenses (see Note 10 of the Notes to Condensed Consolidated Financial Statements for further discussion of the terms of the Revolving Credit Agreement). The consideration also includes contribution certificates as well as contingent consideration depending upon the development of NORCAL's ultimate net losses over a three-year period beginning December 31, 2020. The contribution certificates will be issued to certain NORCAL policyholders in the conversion of NORCAL Mutual, and those instruments are an obligation of NORCAL Insurance Company, the successor of NORCAL. The base consideration and maximum contingent consideration are subject to final verification as the equity allocation is reviewed and finalized post close.

The determination of the fair value of the contingent consideration, along with the allocation of the final purchase consideration to the assets acquired and liabilities assumed was not complete as of the date of this report. The required disclosures related to this acquisition will be provided in ProAssurance's June 30, 2021 report on Form 10-Q upon completion of the valuation of the assets acquired and liabilities assumed.

NORCAL is an underwriter of medical professional liability insurance and this transaction will provide strategic and financial benefits including additional scale and geographic diversification in the physician professional liability market and is expected to be accretive to earnings over time.

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

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes to those statements which accompany this report. Throughout the discussion we use certain terms and abbreviations, which can be found in the Glossary of Terms and Acronyms at the beginning of this report. In addition, a glossary of insurance terms and phrases is available on the investor section of our website. Throughout the discussion, references to "ProAssurance," "PRA," "Company," "we," "us" and "our" refer to ProAssurance Corporation and its consolidated subsidiaries. The discussion contains certain forward-looking information that involves significant risks, assumptions and uncertainties. As discussed under the heading "Caution Regarding Forward-Looking Statements," our actual financial condition and results of operations could differ significantly from these forward-looking statements.

ProAssurance Overview

ProAssurance Corporation is a holding company for property and casualty insurance companies. Our wholly owned insurance subsidiaries provide professional liability insurance, liability insurance for medical technology and life sciences risks and workers' compensation insurance. We also provide capital to Syndicate 1729 and Syndicate 6131 at Lloyd's of London.

We operate in five segments which are based on our internal management reporting structure for which financial results are regularly evaluated by our CODM to determine resource allocation and assess operating performance. Descriptions of ProAssurance's five operating and reportable segments are as follows:

•Specialty P&C - This segment includes our professional liability business and medical technology liability business. Our professional liability insurance is primarily comprised of medical professional liability products offered to healthcare providers and institutions. We also offer, to a lesser extent, professional liability insurance to attorneys and their firms. Medical technology liability insurance is offered to medical technology and life sciences companies that manufacture or distribute products including entities conducting human clinical trials. We also offer custom alternative risk solutions including loss portfolio transfers, assumed reinsurance and captive cell programs for healthcare professional liability insureds. For our alternative market captive cell programs, we cede either all or a portion of the premium to certain SPCs in our Segregated Portfolio Cell Reinsurance segment.

•Workers' Compensation Insurance - This segment includes our workers' compensation insurance business which is provided primarily to employers with 1,000 or fewer employees. Our workers' compensation products include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market program premiums are 100% ceded to either SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer.

•Segregated Portfolio Cell Reinsurance - This segment includes the results (underwriting profit or loss, plus investment results, net of U.S. federal income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations. Each SPC is owned, fully or in part, by an agency, group or association, and the results of the SPCs are attributable to the participants of that cell. We participate to a varying degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest ranges from a low of 20% to a high of 85%. SPC results attributable to external cell participants are reflected as an SPC dividend expense (income) in our Segregated Portfolio Cell Reinsurance segment. The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from our Workers' Compensation Insurance and Specialty P&C segments.

•Lloyd's Syndicates - This segment includes the results from our participation in Lloyd's of London Syndicate 1729 and Syndicate 6131. The results of this segment are normally reported on a quarter lag, except when information is available that is material to the current period. Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S. and international markets while Syndicate 6131 focuses on contingency and specialty property business, also within the U.S. and international markets. To support and grow our core insurance operations, we decreased our participation in the results of Syndicate 1729 for the 2021 underwriting year to 5% from 29%. Syndicate 6131 is an SPA that underwrites on a quota share basis with Syndicate 1729. Effective July 1, 2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an unaffiliated insurer. Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and we decreased our participation in the results of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due to the quarter lag, the change in our participation in the results of Syndicates 1729 and 6131 will not be reflected in our results until the second quarter of 2021.

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•Corporate - This segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. This segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses.

Additional information regarding our segments is included in Note 14 of the Notes to Condensed Consolidated Financial Statements and in the Segment Results sections that follow.

Critical Accounting Estimates

Our Condensed Consolidated Financial Statements are prepared in conformity with GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the amounts we report on those statements. We evaluate these estimates and assumptions on an ongoing basis based on current and historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances, including the potential impacts of the COVID-19 pandemic (see "Item 1A, Risk Factors" and "Critical Accounting Estimates" in our December 31, 2020 report on Form 10-K for additional information). We can make no assurance that actual results will conform to our estimates and assumptions; reported results of operations may be materially affected by changes in these estimates and assumptions.

For further information on the significant accounting policies we follow in making estimates that materially affect financial reporting please refer to the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K. Management considers the following accounting estimates to be critical because they involve significant judgment by management and those judgments could result in a material effect on our financial statements.

Reserve for Losses and Loss Adjustment Expenses

The largest component of our liabilities is our reserve for losses and loss adjustment expenses ("reserve for losses" or "reserve"), and the largest component of expense for our operations is incurred losses and loss adjustment expenses (also referred to as “losses and loss adjustment expenses,” “incurred losses,” “losses incurred” and “losses”). Incurred losses reported in any period reflect our estimate of losses incurred related to the premiums earned in that period as well as any changes to our previous estimate of the reserve required for prior periods.

As of March 31, 2021, our reserve is comprised almost entirely of long-tail exposures. The estimation of long-tailed losses is inherently difficult and is subject to significant judgment on the part of management. Due to the nature of our claims, our loss costs, even for claims with similar characteristics, can vary significantly depending upon many factors, including but not limited to the specific characteristics of the claim and the manner in which the claim is resolved. Long-tailed insurance is characterized by the extended period of time typically required both to assess the viability of a claim and potential damages, if any, and to reach a resolution of the claim. The claims resolution process may extend to more than five years. The combination of continually changing conditions and the extended time required for claim resolution results in a loss cost estimation process that requires actuarial skill and the application of significant judgment, and such estimates require periodic modification.

Our reserve is established by management after taking into consideration a variety of factors including premium rates, historical paid and incurred loss development trends and our evaluation of the current loss environment including frequency, severity, the expected effect of inflation, general economic and social trends, and the legal and political environment. We also take into consideration the conclusions reached by our internal and consulting actuaries. We update and review the data underlying the estimation of our reserve for losses each reporting period and make adjustments to loss estimation assumptions that we believe best reflect emerging data. Both our internal and consulting actuaries perform an in-depth review of our reserve for losses on at least a semi-annual basis using the loss and exposure data of our insurance subsidiaries.

Our reserving process can be broadly grouped into three areas: the establishment of the reserve for the current accident year (the initial reserve), the re-estimation of the reserve for prior accident years (development of prior accident years) and the establishment of the initial reserve for risks assumed in business combinations, applicable only in periods in which acquisitions occur (the acquired reserve).

Current Accident Year - Initial Reserve

Considerable judgment is required in establishing our initial reserve for any current accident year period, as there is limited data available upon which to base our estimate (see further discussion that follows under heading "Use of Judgment"). Our process for setting an initial reserve considers the unique characteristics of each product, but in general we rely heavily on the loss assumptions that were used to price business, as our pricing reflects our analysis of loss costs that we expect to incur relative to the insurance product being priced.

Specialty P&C Segment. Loss costs within this segment are impacted by many factors including but not limited to the nature of the claim, including whether or not the claim is an individual or a mass tort claim, the personal situation of the claimant or the claimant's family, the outcome of jury trials, the legislative and judicial climate where any potential litigation may occur, general economic and social trends and, for claims involving bodily injury, the trend of healthcare costs. Within our

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Specialty P&C segment, for our professional liability business (80% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020; predominately comprised of our HCPL products), we set an initial reserve based upon our evaluation of the current loss environment including frequency, severity, economic inflation, social inflation and legal trends.

We observed a reduction in claims frequency in 2020 that has continued into 2021, some of which is likely associated with the COVID-19 pandemic; however, we continue to remain cautious in recognizing these favorable frequency trends in our current accident year reserve due to the long-tailed nature of our HCPL claims as well as the uncertainty surrounding the length and severity of the pandemic. See further discussion in our Segment Results - Specialty Property & Casualty section that follows under the heading "Losses and Loss Adjustment Expenses."

The risks insured in our Medical Technology Liability business (3% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020) are more varied, and policies are individually priced based on the risk characteristics of the policy and the account. The insured risks range from startup operations to large multinational entities, and the larger entities often have significant deductibles or self-insured retentions. Reserves are established using our most recently developed actuarial estimates of losses expected to be incurred based on factors which include results from prior analysis of similar business, industry indications, observed trends and judgment. Claims in this line of business primarily involve bodily injury to individuals and are affected by factors similar to those of our HCPL line of business. For the Medical Technology Liability business, we also establish an initial reserve using a loss ratio approach, including a provision in consideration of historical loss volatility that this line of business has exhibited.

Workers' Compensation Insurance Segment. Many factors affect the ultimate losses incurred for our workers' compensation coverages (8% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020) including but not limited to the type and severity of the injury, the age, health and occupation of the injured worker, the estimated length of disability, medical treatment and related costs, and the jurisdiction and workers' compensation laws of the state of the injury occurrence.

We use various actuarial methodologies in developing our workers’ compensation reserve, combined with a review of the payroll exposure base. For the current accident year, given the lack of seasoned information, the different actuarial methodologies produce results with significant variability; therefore, more emphasis is placed on supplementing results from the actuarial methodologies with trends in exposure base, medical expense inflation, general inflation, severity, and claim counts, among other things, to select an expected loss ratio.

As in our Specialty P&C segment, we observed a reduction in claims frequency in 2020 that has continued into 2021 in our Workers' Compensation Insurance segment, some of which is likely associated with the COVID-19 pandemic. While we reduced our current accident year loss ratio in 2020 in our Workers' Compensation Insurance segment in response to these favorable trends as these claims are shorter-tailed in nature as compared to our HCPL claims, we continue to remain cautious in our evaluation of the current accident year reserve due to the uncertainty surrounding the length and severity of the pandemic. Furthermore, the impact of legislative and regulatory bodies in certain states changing or attempting to broaden compensability requirements for COVID-19 claims could, if successful, have an adverse impact on the frequency and severity related to COVID-19 claims. See further discussion in the "Insurance Regulatory Matters" section in Part 1, Item 1 of our December 31, 2020 report on Form 10-K. Furthermore, as it relates to both our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the current economic conditions resulting from the COVID-19 pandemic have introduced significant risk of a prolonged recession, which could have an adverse impact on our return to wellness efforts and the ability of injured workers to return to work, resulting in a potential reduction in favorable claim trends in future periods.

Segregated Portfolio Cell Reinsurance Segment. The factors that affect the ultimate losses incurred for the workers' compensation and HCPL coverages assumed by the SPCs at Inova Re and Eastern Re (4% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020) are consistent with that of our Workers’ Compensation Insurance and Specialty P&C segments, respectively.

Lloyd's Syndicates Segment. Initial reserves for Syndicate 1729 and Syndicate 6131 are primarily recorded using the loss assumptions by risk category incorporated into each Syndicate's business plan submitted to Lloyd's with consideration given to loss experience incurred to date (5% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020). The assumptions used in each business plan are consistent with loss results reflected in Lloyd's historical data for similar risks. The loss ratios may also fluctuate due to the mix of earned premium from different open underwriting years which we participate in to varying degrees, as well as the timing of earned premium adjustments. Such adjustments may be the result of premiums for certain policies and assumed reinsurance contracts being reported subsequent to the coverage period and may be subject to adjustment based on loss experience. Premium and exposure for some of Syndicate 1729's insurance policies and reinsurance contracts are initially estimated and subsequently recorded over an extended period of time as reports are received under delegated underwriting authority programs. When reports are received, the premium, exposure and corresponding loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the accident year in which the premium is earned.

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For significant property catastrophe exposures, Syndicate 1729 uses third-party catastrophe models to accumulate a listing of potentially affected policies. Each identified policy is given an estimate of loss severity based upon a combination of factors including the probable maximum loss of each policy, market share analytics, underwriting judgment, client/broker estimates and historical loss trends for similar events. These models are inherently uncertain, reliant upon key assumptions and management judgment and are not always a representation of actual events and ensuing potential loss exposure. Determination of actual losses may take an extended period of time until claims are reported and resolved, including coverage litigation.

Development of Prior Accident Years

In addition to setting the initial reserve for the current accident year, each period we reassess the amount of reserve required for prior accident years.

Our reserve re-estimation process is based upon the most recently completed actuarial analysis supplemented by any new analysis, information or trends that have emerged since the date of that study. We also take into account currently available industry trend information. Changes to previously established reserve estimates are recognized in the current period if management’s best estimate of ultimate losses differs from the estimate previously established. While management considers a variety of variables in determining its best estimate, in general, as claims age, our methodologies give more weight to actual loss costs which, for the majority of our reserves, continue to indicate that ultimate loss costs will be lower than our previous estimates. The discussion in our Critical Accounting Estimates section in Item 7 of our December 31, 2020 report on Form 10-K includes additional information regarding the methodologies used to evaluate our reserve.

Any change in our estimate of net ultimate losses for prior accident years is reflected in net income (loss) in the period in which such changes are made. In recent years such changes have reduced our estimate of consolidated net ultimate losses, resulting in a reduction of reported losses for the period and a corresponding increase in pre-tax income.

Due to the size of our consolidated reserve for losses and the large number of claims outstanding at any point in time, even a small percentage adjustment to our total reserve estimate could have a material effect on our results of operations for the period in which the adjustment is made. Please refer to the Executive Summary of Operations and Segment Results sections that follow for a discussion on consolidated and segment prior accident year loss development recognized in the current period.

Use of Judgment

The process of estimating reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both views of internal and external events, such as changes in views of economic inflation, legal trends and legislative changes, as well as differentiating views of individuals involved in the reserve estimation process, among others. We continually refine our estimates in a regular, ongoing process as historical loss experience develops and additional claims are reported and settled. Our objective is to consider all significant facts and circumstances known at the time.

Changes in economic conditions and steps taken by the federal government and the Federal Reserve in response to COVID-19 could lead to inflation trends that are different from those we anticipated when establishing our reserves, which could in turn lead to an increase or decrease in our loss costs and the need to strengthen or reduce reserves. These impacts of inflation on loss costs and reserves could be more pronounced for our HCPL line of business as that business generally requires a longer period of time to settle claims for a given accident year and, accordingly, is relatively more inflation sensitive.

We use various actuarial methods in the process of setting reserves. Each actuarial method generally returns a different value, and for the more recent accident years the variations among the various methodologies can be significant. In order to project ultimate losses, we partition our reserves for analysis such as by line of business, geography, coverage layer or accident year. For each partition of our reserves, we evaluate the results of the various methods, along with the supplementary statistical data regarding such factors as closed with and without indemnity ratios, claim severity trends, the expected duration of such trends, changes in the legal and legislative environment and the current economic environment to develop a point estimate based upon management's judgment and past experience. The series of selected point estimates is then combined to produce an overall point estimate for ultimate losses.

HCPL. Over the past several years the most influential factor affecting the analysis of our HCPL reserves and the related development recognized has been an observed increase in claim severity for the broader medical professional liability industry as well as higher initial loss expectations on incurred claims. The severity trend is an explicit component of our pricing models and directly impacts the reserving process. Our estimate of this trend and our expectations about changes in this trend impact a variety of factors, from the selection of expected loss ratios to the ultimate point estimates established by management.

Because of the implicit and wide-ranging nature of severity trend assumptions on the loss reserving process, it is not practical to specifically isolate the impact of changing severity trends. However, because severity is an explicit component of our HCPL pricing process we can better isolate the impact that changing severity can have on our loss costs and loss ratios in regards to our pricing models for this business component. Our current HCPL pricing models assume severity trends in the

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range of 2% to 5% depending on state, territory and specialty. In some portions of our HCPL business we have observed and reflected higher severity trends in our estimates of losses and loss adjustment expenses.

Due to the long-tailed nature of our claims and the previously discussed historical volatility of loss costs, selection of a severity trend assumption is a subjective process that is inherently likely to prove inaccurate over time. Given the long tail and volatility, we are generally cautious in making changes to the severity assumptions within our pricing models. All open claims and accident years are generally impacted by a change in the severity trend, which compounds the effect of such a change.

Although the future degree and impact of the ultimate severity trend remains uncertain due to the long-tailed nature of our business, we have given consideration to observed loss costs in setting our rates. For our HCPL business, this practice had generally resulted in rate reductions as claim frequency declined and remained at historically low levels. However, from early 2017 to the current period, the average pricing on renewed business has steadily increased reflective of the rising loss cost environment, and we anticipate further renewal pricing increases due to increasing loss severity.

More recently, another factor affecting our analysis of our HCPL reserves and the related development recognized is the reduction in claims frequency in 2020, some of which is likely associated with the COVID-19 pandemic, as previously discussed. In 2020, we established a $10 million reserve related to COVID-19. This reserve represents our best estimate of ultimate COVID-19 related losses based on currently available information and reported incidents. Similar to our views on our current accident year reserve, we remain cautious in recognizing these favorable frequency trends in our prior accident year reserve due to the long-tailed nature of our HCPL claims as well as the uncertainty surrounding the length and severity of the pandemic. Accordingly, no adjustment has been made to this reserve since 2020.

Workers' Compensation. The projection of changes in claim severity trend has not historically been an influential factor affecting our analysis of workers' compensation reserves, as claims are typically resolved more quickly than the industry norm. As previously mentioned, the determination and calculation of loss development factors, in particular, the selection of tail factors which are used to extend the projection of losses beyond historical data, requires considerable judgment.

Investment Valuations

We record the majority of our investments at fair value as shown in the table below. At March 31, 2021, the distribution of our investments based on GAAP fair value hierarchies (levels) was as follows:


	Distribution by GAAP Fair Value Hierarchy
	Level 1	Level 2	Level 3	Not Categorized	Total Investments
Investments recorded at:
Fair value	10%	78%	1%	7%	96%
Other valuations					4%
Total Investments					100%

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. All of our fixed maturity and equity investments are carried at fair value. The fair value of our short-term securities approximates the cost of the securities due to their short-term nature.

Because of the number of securities we own and the complexity of developing accurate fair values, we utilize multiple independent pricing services to assist us in establishing the fair value of individual securities. The pricing services provide fair values based on exchange-traded prices, if available. If an exchange-traded price is not available, the pricing services, if possible, provide a fair value that is based on multiple broker/dealer quotes or that has been developed using pricing models. Pricing models vary by asset class and utilize currently available market data for securities comparable to ours to estimate a fair value for our securities. The pricing services scrutinize market data for consistency with other relevant market information before including the data in the pricing models. The pricing services disclose the types of pricing models used and the inputs used for each asset class. Determining fair values using these pricing models requires the use of judgment to identify appropriate comparable securities and to choose a valuation methodology that is appropriate for the asset class and available data.

The pricing services provide a single value per instrument quoted. We review the values provided for reasonableness each quarter by comparing market yields generated by the supplied value versus market yields observed in the marketplace. We also compare yields indicated by the provided values to appropriate benchmark yields and review for values that are unchanged or that reflect an unanticipated variation as compared to prior period values. We utilize a primary pricing service for each security type and compare provided information for consistency with alternate pricing services, known market data and information from our own trades, considering both values and valuation trends. We also review weekly trades versus the prices supplied by the services. If a supplied value appears unreasonable, we discuss the valuation in question with the pricing service and make

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adjustments if deemed necessary. Historically our review has not resulted in any material changes to the values supplied by the pricing services. The pricing services do not provide a fair value unless an exchange-traded price or multiple observable inputs are available. As a result, the pricing services may provide a fair value for a security in some periods but not others, depending upon the level of recent market activity for the security or comparable securities.

Level 1 Investments

Fair values for a majority of our equity securities and portions of our short-term and convertible securities are determined using exchange-traded prices. There is little judgment involved when fair value is determined using an exchange-traded price. In accordance with GAAP, we classify securities valued using an exchange-traded price as Level 1 securities.

Level 2 Investments

Most fixed income securities do not trade daily; thus, exchange-traded prices are generally not available for these securities. However, market information (often referred to as observable inputs or market data, including but not limited to, last reported trade, non-binding broker quotes, bids, benchmark yield curves, issuer spreads, two-sided markets, benchmark securities, offers and recent data regarding assumed prepayment speeds, cash flow and loan performance data) is available for most of our fixed income securities. We determine fair value for a large portion of our fixed income securities using available market information. In accordance with GAAP, we classify securities valued based on multiple market observable inputs as Level 2 securities.

Level 3 Investments

When a pricing service does not provide a value for one of our fixed maturity securities, management estimates fair value using either a single non-binding broker quote or pricing models that utilize market based assumptions which have limited observable inputs. The process involves significant judgment in selecting the appropriate data and modeling techniques to use in the valuation process. In accordance with GAAP, we classify securities valued using limited observable inputs as Level 3 securities.

Fair Values Not Categorized

We hold interests in certain investment funds, primarily LPs/LLCs, which measure fund assets at fair value on a recurring basis and provide us with a NAV for our interest. As a practical expedient, we consider the NAV provided to approximate the fair value of the interest. In accordance with GAAP, we do not categorize these investments within the fair value hierarchy.

Nonrecurring Fair Value Measurements

We measure the fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. These assets include investments carried principally at cost, investments in tax credit partnerships, fixed assets, goodwill and other intangible assets. These assets would also include any equity method investments that do not provide a NAV. We did not have any assets or liabilities that were measured at fair value on a nonrecurring basis at March 31, 2021 or December 31, 2020.

Investments - Other Valuation Methodologies

Certain of our investments, in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. At March 31, 2021, these investments represented approximately 4% of total investments, and are detailed in the following table. Additional information about these investments is provided in Notes 2 and 3 of the Notes to Condensed Consolidated Financial Statements.


(In millions)	Carrying Value		GAAP Measurement Method
Other investments:

Other, principally FHLB capital stock	$	2.4	Principally Cost

Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships	24.4		Equity
Equity method investments, primarily LPs/LLCs	48.1		Equity
	72.5
BOLI	66.9		Cash surrender value
Total investments - Other valuation methodologies	$	141.8

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Impairments

We evaluate our available-for-sale investment securities, which at March 31, 2021 and December 31, 2020 consisted entirely of fixed maturity securities, on at least a quarterly basis for the purpose of determining whether declines in fair value below recorded cost basis represent an impairment loss. We consider a credit-related impairment loss to have occurred:

•if there is intent to sell the security;

•if it is more likely than not that the security will be required to be sold before full recovery of its amortized cost basis; or

•if the entire amortized basis of the security is not expected to be recovered.

The assessment of whether the amortized cost basis of a security is expected to be recovered requires management to make assumptions regarding various matters affecting future cash flows. The choice of assumptions is subjective and requires the use of judgment. Actual credit losses experienced in future periods may differ from management’s estimates of those credit losses. Methodologies used to estimate the present value of expected cash flows are:

The estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. We consider various factors in projecting recovery values and recovery time frames, including the following:

•third-party research and credit rating reports;

•the current credit standing of the issuer, including credit rating downgrades, whether before or after the balance sheet date;

•the extent to which the decline in fair value is attributable to credit risk specifically associated with the security or its issuer;

•internal assessments and the assessments of external portfolio managers regarding specific circumstances surrounding an investment, which indicate the investment is more or less likely to recover its amortized cost than other investments with a similar structure;

•for asset-backed securities, the origination date of the underlying loans, the remaining average life, the probability that credit performance of the underlying loans will deteriorate in the future and our assessment of the quality of the collateral underlying the loan;

•failure of the issuer of the security to make scheduled interest or principal payments;

•any changes to the rating of the security by a rating agency;

•recoveries or additional declines in fair value subsequent to the balance sheet date;

•adverse legal or regulatory events;

•significant deterioration in the market environment that may affect the value of collateral (e.g. decline in real estate prices);

•significant deterioration in economic conditions; and

•disruption in the business model resulting from changes in technology or new entrants to the industry.

If deemed appropriate and necessary, a discounted cash flow analysis is performed to confirm whether a credit loss exists and, if so, the amount of the credit loss. We use the single best estimate approach for available-for-sale debt securities and consider all reasonably available data points, including industry analyses, credit ratings, expected defaults and the remaining payment terms of the debt security. For fixed rate available-for-sale debt securities, cash flows are discounted at the security's effective interest rate implicit in the security at the date of acquisition. If the available-for-sale debt security’s contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, for example, the prime rate, the LIBOR, or the U.S. Treasury bill weekly average, that security’s effective interest rate is calculated based on the factor as it changes over the life of the security. If we intend to sell a debt security or believe we will more likely than not be required to sell a debt security before the amortized cost basis is recovered, any existing allowance will be written off against the security's amortized cost basis, with any remaining difference between the debt security's amortized cost basis and fair value recognized as an impairment loss in earnings.

Exclusive of securities where there is an intent to sell or where it is not more likely than not that the security will be required to be sold before recovery of its amortized cost basis, impairment for debt securities is separated into a credit component and a non-credit component. The credit component of an impairment is the difference between the security’s amortized cost basis and the present value of its expected future cash flows, while the non-credit component is the remaining difference between the security’s fair value and the present value of expected future cash flows. An allowance for expected credit losses will be recorded for the expected credit losses through income and the non-credit component is recognized in OCI. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the available-for-sale debt security.

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Deferred Policy Acquisition Costs

Policy acquisition costs (primarily commissions, premium taxes and underwriting salaries) which are directly related to the successful acquisition of new and renewal premiums are capitalized as DPAC and charged to expense, net of ceding commissions earned, as the related premium revenue is recognized. We evaluate the recoverability of our DPAC typically at the segment level each reporting period or in a manner that is consistent with the way we manage our business. Any amounts estimated to be unrecoverable are charged to expense in the current period.

As part of our evaluation of the recoverability of DPAC, we also evaluate our unearned premiums for premium deficiencies. A premium deficiency is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized DPAC and maintenance costs, net of anticipated investment income, exceeds the related unearned premium. If a premium deficiency is identified, the associated DPAC is written off, and a PDR is recorded for the excess deficiency as a component of net losses and loss adjustment expenses in our Condensed Consolidated Statement of Income and Comprehensive Income and as a component of the reserve for losses on our Condensed Consolidated Balance Sheet. During the three months ended March 31, 2021 we did not determine any DPAC to be unrecoverable.

Estimation of Taxes / Tax Credits

For interim periods, we generally utilize the estimated annual effective tax rate method under which we determine our provision (benefit) for income taxes based on the current estimate of our annual effective tax rate. Under the estimated annual effective tax rate method, items which are unusual, infrequent, or that cannot be reliably estimated are considered in the effective tax rate in the period in which the item is included in income, and are referred to as discrete items. In calculating our year-to-date income tax expense (benefit), we include the estimated benefit of tax credits for the year-to-date period based on the most recently available information provided by the tax credit partnerships; the actual amounts of credits provided by the tax credit partnerships may prove to be different than our estimates. The effect of such a difference is recognized in the period identified.

Deferred Taxes

Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Our temporary differences principally relate to our loss reserves, unearned and advanced premiums, DPAC, tax credit carryforwards, compensation related items, unrealized investment gains (losses) and basis differences on fixed assets, intangible assets and operating leases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when such benefits are realized. We review our deferred tax assets quarterly for impairment. If we determine that it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation allowance is recorded to reduce the carrying value of the asset. In assessing the need for a valuation allowance, management is required to make certain judgments and assumptions about our future operations based on historical experience and information as of the measurement period regarding reversal of existing temporary differences, carryback capacity, future taxable income of the appropriate character (including its capital and operating characteristics) and tax planning strategies.

A valuation allowance was established in a prior year against the deferred tax asset related to the NOL carryforwards for the U.K. operations. In addition, a valuation allowance was established in 2020 against a portion of the deferred tax asset related to the U.S. state NOL carryforwards. Management concluded that it was more likely than not that these deferred tax assets will not be realized. We also established a valuation allowance in a prior year against the deferred tax assets of certain SPCs at our wholly owned Cayman Islands reinsurance subsidiary, Inova Re. Due to the limited operations of these SPCs, management concluded that a valuation allowance was required. As of March 31, 2021, management concluded that a valuation allowance was still required against the deferred tax assets related to the NOL carryforwards for the U.K. operations, against the deferred tax assets related to the U.S. state NOL carryforwards and against the deferred tax assets of certain SPCs at Inova Re. See further discussion in Note 5 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K.

U.S. Tax Legislation

Coronavirus Aid, Relief and Economic Security Act

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American Rescue Plan Act of 2021

In response to economic concerns associated with COVID-19, the American Rescue Plan Act of 2021 was signed into law on March 11, 2021 and includes an expansion of the number of employees covered by the limitation on the deductibility of compensation in excess of $1 million. This provision is effective for tax years beginning after December 31, 2026. We have evaluated this provision as well as the other provisions of the American Rescue Plan Act of 2021 and concluded that they will not have a material impact on our financial position or results of operations as of March 31, 2021. See further discussion in Note 5 of the Notes to Condensed Consolidated Financial Statements.

Unrecognized Tax Benefits

We evaluate tax positions taken on tax returns and recognize positions in our financial statements when it is more likely than not that we will sustain the position upon resolution with a taxing authority. If recognized, the benefit is measured as the largest amount of benefit that has a greater than 50% probability of being realized. We review uncertain tax positions each quarter, considering changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law, and make adjustments as we consider necessary. Adjustments to our unrecognized tax benefits may affect our income tax expense, and settlement of uncertain tax positions may require the use of cash. Other than differences related to timing, no significant adjustments were considered necessary during the three months ended March 31, 2021 or 2020. At March 31, 2021, our liability for unrecognized tax benefits approximated $5.2 million.

Goodwill / Intangibles

Goodwill and intangible assets are tested for impairment annually or more frequently if circumstances indicate an impairment may have occurred. The date of our annual impairment testing is October 1. Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in Note 14 of the Notes to Condensed Consolidated Financial Statements. Of the five reporting units, two have net goodwill - Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance. For our last annual impairment test at October 1, 2020, we performed qualitative assessments for our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units (see Note 6 of the Notes to Condensed Consolidated Financial Statements). Management concluded that it was not more likely than not that the fair value of each of our two reporting units that have net goodwill was less than the carrying value of each reporting unit as of the testing date; therefore no further impairment testing was required. In addition, there were no triggering events as of March 31, 2021 that would suggest an updated impairment test would be needed for our goodwill and intangible assets. Additional information regarding our goodwill and intangible assets is included Note 1 and Note 6 of the Notes to Consolidated Financial Statements included in our December 31, 2020 report on Form 10-K.

Given the evolving, uncertain nature of the COVID-19 pandemic, the estimates and assumptions used by management in these impairment tests have inherent uncertainties, and different assumptions could lead to materially different results including impairment charges in the future. Management expects to continue to monitor developments and perform updated analyses as necessary.

Accounting Changes

We did not have any change in accounting estimate or policy that had a material effect on our results of operations or financial position during the three months ended March 31, 2021. We are not aware of any accounting changes not yet adopted as of March 31, 2021 that could have a material impact on our results of operations, financial position or cash flows.

Liquidity and Capital Resources and Financial Condition

Overview

ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. As a holding company, our principal source of external revenue is our investment revenues. In addition, dividends from our operating subsidiaries represent another source of funds for our obligations, including debt service and shareholder dividends. We also charge our operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments a management fee based on the extent to which services are provided to the subsidiary and the amount of gross premium written by the subsidiary. At March 31, 2021, we held cash and liquid investments of approximately $250 million outside our insurance subsidiaries that were available for use without regulatory approval or other restriction. We also have $250 million in permitted borrowings available under our Revolving Credit Agreement as well as the possibility of a $50 million accordion feature, if successfully subscribed. As of April 30, 2021, no borrowings were outstanding under our Revolving Credit Agreement.

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To date, during 2021, our operating subsidiaries have paid dividends to us of approximately $15 million, all of which were paid in April 2021. Dividends paid in April 2021 have not been included in our cash and liquid investments held outside of our insurance subsidiaries at March 31, 2021. In the aggregate, our insurance subsidiaries are permitted to pay dividends of approximately $92 million over the remainder of 2021 without prior approval of state insurance regulators. However, the payment of any dividend requires prior notice to the insurance regulator in the state of domicile, and the regulator may reduce or prevent the dividend if, in its judgment, payment of the dividend would have an adverse effect on the surplus of the insurance subsidiary. We make the decision to pay dividends from an insurance subsidiary based on the capital needs of that subsidiary and may pay less than the permitted dividend or may also request permission to pay an additional amount (an extraordinary dividend).

Cash Flows

Cash flows between periods compare as follows:


	Three Months Ended March 31
(In thousands)	2021		2020		Change
Net cash provided (used) by:
Operating activities	$	28,700	$	(12,049)	$	40,749
Investing activities	(26,261)		71,825		(98,086)
Financing activities	(3,386)		(17,976)		14,590
Increase (decrease) in cash and cash equivalents	$	(947)	$	41,800	$	(42,747)


	Three Months Ended March 31
(In thousands)	2020		2019		Change
Net cash provided (used) by:
Operating activities	$	(12,049)	$	34,392	$	(46,441)
Investing activities	71,825		3,868		67,957
Financing activities	(17,976)		(46,901)		28,925
Increase (decrease) in cash and cash equivalents	$	41,800	$	(8,641)	$	50,441

The principal components of our operating cash flows are the excess of premiums collected and net investment income over losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the payment of losses associated with the premiums. Premiums are generally collected within the twelve-month period after the policy is written, while our claim payments are generally paid over a more extended period of time. Likewise, timing delays exist between the payment of claims and the collection of any associated reinsurance recoveries.

The increase in operating cash flows for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 of $40.7 million was primarily due to a decrease in paid losses of $54.5 million driven by our Specialty P&C and Segregated Portfolio Cell Reinsurance segments. The decrease in paid losses in our Specialty P&C segment was primarily due to a smaller number of claims resolved with large indemnity payments as compared to the prior year period, some of which is likely associated with the COVID-19 pandemic including the disruption of the court systems. The decrease in paid losses in our Segregated Portfolio Cell Reinsurance segment reflected the effect of the payment of a $10 million claim during the first quarter of 2020 by an SPC at Eastern Re in which we do not participate. This claim payment related to a reserve established by the SPC in 2019 related to an errors and omissions liability policy. Additionally, the increase in operating cash flows reflected a decrease in cash paid for operating expenses of $17.7 million driven by a decrease in various operational expenses in our Specialty P&C, Workers' Compensation Insurance and Corporate segments resulting from improvements over the past year including organizational structure enhancements and improved operating efficiencies. In addition, the decrease in cash paid for operating expenses was due to our decreased participation in the results of Syndicate 1729 for the 2020 underwriting year. Furthermore, the increase in operating cash flows reflected a tax refund of approximately $9.0 million which we received in February 2021 (see additional discussion within this section under the heading "Taxes" that follows). The increase in operating cash flows was partially offset by a decrease in net premium receipts of $33.6 million driven by our Lloyd's Syndicates and Specialty P&C segments. The decrease in premium receipts in our Lloyd's Syndicates segment reflected our decreased participation in the results of Syndicate 1729 for the 2020 underwriting year. The decrease in premium receipts in our Specialty P&C segment was due to our re-underwriting efforts and the dissolution of our arrangement with CAPAssurance. The remaining variance in operating cash flows for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 was comprised of individually insignificant components.

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The decrease in operating cash flows for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 of $46.4 million was primarily due to an increase in paid losses of $54.2 million and a decrease in net premium receipts of $9.3 million. The increase in paid losses was driven by our Specialty P&C and Segregated Portfolio Cell Reinsurance segments. The increase in paid losses in our Specialty P&C segment was primarily due to higher average claim payments. The increase in paid losses in our Segregated Portfolio Cell Reinsurance segment reflected the aforementioned payment of a $10 million claim by an SPC at Eastern Re. The decrease in net premium receipts was primarily due to a decline in written premium in our Specialty P&C and Workers' Compensation Insurance segments. The decrease in operating cash flows was somewhat offset by a decrease in 2020 tax payments as compared to 2019 of $6.4 million and a decrease in paid bonuses of $3.0 million. The decrease in tax payments was primarily due to refunds received during the three months ended March 31, 2020. The remaining variance in operating cash flows for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 was comprised of individually insignificant components.

We manage our investing cash flows to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations as discussed in this section under the heading "Investing Activities and Related Cash Flows."

Our financing cash flows are primarily comprised of dividend payments and borrowings and repayments under our Revolving Credit Agreement. See further discussion of our financing activities in this section under the heading "Financing Activities and Related Cash Flows."

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Operating Activities and Related Cash Flows

Reinsurance

Within our Specialty P&C segment, we use insurance and reinsurance (collectively, “reinsurance”) to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages we offer and to provide protection against losses in excess of policy limits. Within our Workers' Compensation Insurance segment, we use reinsurance to reduce our net liability on individual risks, to mitigate the effect of significant loss occurrences (including catastrophic events), to stabilize underwriting results and to increase underwriting capacity by decreasing leverage. In both our Specialty P&C and Workers' Compensation Insurance segments, we use reinsurance in risk sharing arrangements to align our objectives with those of our strategic business partners and to provide custom insurance solutions for large customer groups. Within our Lloyd's Syndicates segment, Syndicate 1729 utilizes reinsurance to provide capacity to write larger limits of liability on individual risks, to provide protection against catastrophic loss and to provide protection against losses in excess of policy limits. The discussion in our Liquidity section under the same heading in Item 7 of our December 31, 2020 report on Form 10-K includes additional information regarding our reinsurance agreements.

Excess of Loss Reinsurance Agreements

We generally reinsure risks under treaties (our excess of loss reinsurance agreements) pursuant to which the reinsurers agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the maximum individual limits offered. Generally, these agreements are negotiated and renewed annually. Our HCPL treaty renews annually on October 1 and, for the October 1, 2020 renewal, we increased our retention to $2 million from $1 million and added provisions for reinstatement premiums which resulted in a reduction to the gross rate paid under the renewed treaty. Historically, our Medical Technology Liability treaty renewed annually on January 1; however, the treaty that renewed on January 1, 2020 renewed on a short-term basis and was renewed again for a full year term on October 1, 2020 along with our HCPL treaty. Our Medical Technology Liability treaty which renewed on October 1, 2020 renewed at a lower rate than the previous agreement, with an increase in retention to $2 million from $1 million. Our Workers' Compensation treaty renews annually on May 1. Our traditional workers' compensation treaty renewed May 1, 2020 at a higher rate than the previous agreement, with an increase in the AAD to 3.16% from 2.1% of ceded earned premium, in excess of the $0.5 million retention per loss occurrence; all other material treaty terms were consistent with the expiring agreement. The significant coverages provided by our current excess of loss reinsurance agreements are detailed in the following table.

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Excess of Loss Reinsurance Agreements

Healthcare Professional Liability

Medical Technology & Life Sciences Products

Workers'
Compensation - Traditional

(1) Effective October 1, 2020, one prepaid limit reinstatement of $21M and a second limit reinstatement of up to $21M for the second layer, subject to reinstatement premium, which attaches after the first reinstatement has been completely exhausted. All limit reinstatements thereafter require no additional premium.

(2) Prior to October 1, 2020, retention was $1M.

(3) Historically, retention has ranged from 5% to 32.5%.

(4) Historically, retention has ranged from $1M to $2M.

(5) Includes an AAD where retention is 3.16% of subject earned premium in annual losses otherwise recoverable in excess of the $500K retention per loss occurrence.

Large HCPL risks that are above the limits of our basic reinsurance treaties are reinsured on a facultative basis, whereby the reinsurer agrees to insure a particular risk up to a designated limit. We also have in place a number of risk sharing arrangements that apply to the first $2 million of losses for certain large healthcare systems and other insurance entities, as well as with certain insurance agencies that produce business for us.

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Other Reinsurance Arrangements

For the workers' compensation business ceded to Inova Re and Eastern Re, each SPC has in place its own reinsurance arrangements; which are illustrated in the following table.

Segregated Portfolio Cell Reinsurance


Per Occurrence Coverage						Aggregate Coverage

(1) The attachment point is based on a percentage of written premium within individual cells, ranges from 85% to 94%, and varies by cell.

Each SPC has participants and the profit or loss of each cell accrues fully to these cell participants. As previously discussed, we participate in certain SPCs to a varying degree. Each SPC maintains a loss fund initially equal to the difference between premium assumed by the cell and the ceding commission. The external participants of each cell provide collateral to us, typically in the form of a letter of credit, that is initially equal to the difference between the loss fund of the SPC (amount of funds available to pay losses after deduction of ceding commission) and the aggregate attachment point of the reinsurance. Over time, an SPC's retained profits are considered in the determination of the collateral amount required to be provided by the cell's external participants.

Taxes

We are subject to the tax laws and regulations of the U.S., Cayman Islands and U.K. We file a consolidated U.S. federal income tax return that includes the parent company and its U.S. subsidiaries. Our filing obligations include a requirement to make quarterly payments of estimated taxes to the IRS using the corporate tax rate effective for the tax year. We did not make any quarterly estimated tax payments during the three months ended March 31, 2021 or 2020.

As a result of the CARES Act that was signed into law on March 27, 2020, as previously discussed, we now have the ability to carryback NOLs generated in tax years 2018, 2019 and 2020 for up to five years. See further discussion in Note 5 of the Notes to Consolidated Financial Statements included in our December 31, 2020 report on Form 10-K. We have an NOL of approximately $45.3 million from the 2020 tax year that will be carried back to the 2015 tax year and is expected to generate a tax refund of approximately $15.9 million. Additionally, we had an NOL of approximately $25.6 million from the 2019 tax year which was carried back to the 2014 tax year and generated a tax refund of approximately $9.0 million which we received in February 2021.

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Investing Activities and Related Cash Flows

Our investments at March 31, 2021 and December 31, 2020 are comprised as follows:


	March 31, 2021				December 31, 2020
($ in thousands)	Carrying Value		% of Total Investment		Carrying Value		% of Total Investment
Fixed maturities, available-for-sale
U.S. Treasury obligations	$	102,877	3	%	$	107,059	3	%
U.S. Government-sponsored enterprise obligations	11,944		1	%	12,261		1	%
State and municipal bonds	322,465		9	%	332,920		10	%
Corporate debt	1,428,866		42	%	1,329,342		39	%
Residential mortgage-backed securities	271,548		8	%	276,541		8	%
Commercial mortgage-backed securities	135,037		4	%	126,402		4	%
Other asset-backed securities	290,536		9	%	273,006		8	%
Total fixed maturities, available-for-sale	2,563,273		76	%	2,457,531		73	%
Fixed maturities, trading	45,151		1	%	48,456		1	%
Total fixed maturities	2,608,424		77	%	2,505,987		74	%
Equity investments	77,537		2	%	120,101		4	%
Short-term investments	280,993		8	%	337,813		10	%
BOLI	66,932		2	%	67,847		2	%
Investment in unconsolidated subsidiaries	299,360		9	%	310,529		9	%
Other investments	71,621		2	%	47,068		1	%
Total investments	$	3,404,867	100	%	$	3,389,345	100	%

At March 31, 2021, 99% of our investments in available-for-sale fixed maturity securities were rated and the average rating was A+. The distribution of our investments in available-for-sale fixed maturity securities by rating were as follows:


	March 31, 2021				December 31, 2020
($ in thousands)	Carrying Value		% of Total Investment		Carrying Value		% of Total Investment
Rating*
AAA	$	721,870	28	%	$	717,187	29	%
AA+	100,285		4	%	103,996		4	%
AA	170,503		7	%	168,452		7	%
AA-	116,165		4	%	122,733		5	%
A+	207,918		8	%	197,274		8	%
A	360,371		14	%	323,044		13	%
A-	244,943		10	%	245,464		10	%
BBB+	196,769		8	%	189,971		8	%
BBB	210,681		8	%	190,385		8	%
BBB-	82,604		3	%	59,847		2	%
Below investment grade	138,949		5	%	133,607		5	%
Not rated	12,215		1	%	5,571		1	%
Total	$	2,563,273	100	%	$	2,457,531	100	%
*Average of three NRSRO sources, presented as an S&P equivalent. Source: S&P, Copyright ©2021, S&P Global Market Intelligence

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A detailed listing of our investment holdings as of March 31, 2021 is located under the Financial Information heading on the Investor Relations page of our website which can be reached directly at www.proassurance.com/investmentholdings or through links from the Investor Relations section of our website, investor.proassurance.com.

We manage our investments to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations. Furthermore, we have managed our investments as part of our capital planning in anticipation of closing our acquisition of NORCAL. In addition to the interest and dividends we will receive from our investments, we anticipate that between $40 million and $110 million of our portfolio will mature (or be paid down) each quarter over the next twelve months and become available, if needed, to meet our cash flow requirements. The primary outflow of cash at our insurance subsidiaries is related to paid losses and operating costs, including income taxes. The payment of individual claims cannot be predicted with certainty; therefore, we rely upon the history of paid claims in estimating the timing of future claims payments with consideration to current and anticipated industry trends and macroeconomic conditions. To the extent that we may have an unanticipated shortfall in cash, we may either liquidate securities or borrow funds under existing borrowing arrangements through our Revolving Credit Agreement and the FHLB system. Permitted borrowings under our Revolving Credit Agreement are $250 million with the possibility of an additional $50 million accordion feature, if successfully subscribed. Given the duration of our investments, we do not foresee a shortfall that would require us to meet operating cash needs through additional borrowings. Additional information regarding our Revolving Credit Agreement is detailed in Note 10 of the Notes to Condensed Consolidated Financial Statements.

At March 31, 2021, our FAL was comprised of fixed maturity securities with a fair value of $102.8 million and cash and cash equivalents of $4.0 million deposited with Lloyd's. See further discussion in Note 3 of the Notes to Condensed Consolidated Financial Statements.

Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 94% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average effective duration of our fixed maturity securities at March 31, 2021 was 3.39 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities was 3.06 years.

The carrying value and unfunded commitments for certain of our investments were as follows:


	Carrying Value				March 31, 2021
($ in thousands, except expected funding period)	March 31, 2021		December 31, 2020		Unfunded Commitment		Expected funding period in years
Qualified affordable housing project tax credit partnerships (1)	$	24,351	$	27,719	$	744	6

All other investments, primarily investment fund LPs/LLCs	275,009		282,810		116,508		3
Total	$	299,360	$	310,529	$	117,252
(1) The carrying value reflects our total commitments (both funded and unfunded) to the partnerships, less any amortization, since our initial investment. We fund these investments based on funding schedules maintained by the partnerships.

Investment fund LPs/LLCs are by nature less liquid and may involve more risk than other investments. We manage our risk through diversification of asset class and geographic location. At March 31, 2021, we had investments in 30 separate investment funds with a total carrying value of $275.0 million which represented approximately 8% of our total investments. Our investment fund LPs/LLCs generate earnings from trading portfolios, secured debt, debt securities, multi-strategy funds and private equity investments, and the performance of these LPs/LLCs is affected by the volatility of equity and credit markets. For our investments in LPs/LLCs, we record our allocable portion of the partnership operating income or loss as the results of the LPs/LLCs become available, typically following the end of a reporting period.

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Acquisitions

On May 5, 2021, we completed the acquisition of NORCAL by purchasing over 98% of the converted company stock in exchange for base consideration of $441 million, which includes cash from ProAssurance of $248 million. The cash consideration from ProAssurance was funded by cash on hand as of May 5, 2021. The final purchase consideration also includes contribution certificates as well as contingent consideration depending upon the development of NORCAL's ultimate net losses over a three-year period beginning December 31, 2020. The base consideration and maximum contingent consideration are subject to final verification as the equity allocation is reviewed and finalized post close. The Agreement and Plan of Acquisition was previously filed as Exhibit 10.19 to our December 31, 2020 report on Form 10-K. Additional information regarding our acquisition of NORCAL is included in Note 15 of the Notes to Condensed Consolidated Financial Statements.

Financing Activities and Related Cash Flows

Treasury Shares

During the three months ended March 31, 2021 and 2020, we did not repurchase any common shares and, as of April 30, 2021, our remaining Board authorization was approximately $110 million.

ProAssurance Shareholder Dividends

Our Board declared quarterly cash dividends of $0.05 and $0.31 per share during the first quarter of 2021 and 2020, respectively. Dividends are paid the month following the quarter in which they are declared. Any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of financial performance, future expectations and other factors deemed relevant by the Board.

Debt

At March 31, 2021 our debt included $250 million of outstanding unsecured senior notes. The notes bear interest at 5.3% annually and are due in 2023 although they may be redeemed in whole or part prior to maturity. There are no financial covenants associated with these notes.

We have a Revolving Credit Agreement, which expires in November 2024, that may be used for general corporate purposes, including, but not limited to, short-term working capital, share repurchases as authorized by the Board and support for other activities. Our Revolving Credit Agreement permits borrowings of up to $250 million as well as the possibility of a $50 million accordion feature, if successfully subscribed. At March 31, 2021, there were no outstanding borrowings on our Revolving Credit Agreement; we are in compliance with the financial covenants of the Revolving Credit Agreement. On May 6, 2021, we borrowed $15 million under our Revolving Credit Agreement to pay certain transaction-related expenses associated with our acquisition of NORCAL (see Note 15 of the Notes to Condensed Consolidated Financial Statements for additional information).

We have Mortgage Loans with one lender in connection with the recapitalization of two office buildings, which mature in December 2027. The Mortgage Loans accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on a quarterly basis. At March 31, 2021, the outstanding balance of the Mortgage Loans was approximately $36 million; we are in compliance with the financial covenant of the Mortgage Loans.

Additional information regarding our debt is provided in Note 10 of the Notes to Condensed Consolidated Financial Statements.

We utilize an interest rate cap agreement with a notional amount of $35 million to manage our exposure to increases in LIBOR on our Mortgage Loans. Per the interest rate cap agreement, we are entitled to receive cash payments if and when the three-month LIBOR exceeds 2.35%. Additional information on our interest rate cap agreement is provided in Note 11 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K.

Two of our insurance subsidiaries are members of an FHLB. Through membership, those subsidiaries have access to secured cash advances which can be used for liquidity purposes or other operational needs. In order for us to use FHLB proceeds, regulatory approvals may be required depending on the nature of the transaction. To date, those subsidiaries have not materially utilized their membership for borrowing purposes.

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Results of Operations – Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Selected consolidated financial data for each period is summarized in the table below.


	Three Months Ended March 31
($ in thousands, except per share data)		2021			2020			Change
Revenues:
Net premiums written		$	202,270		$	232,217		$	(29,947)


Net premiums earned		$	187,358		$	203,855		$	(16,497)


Net investment result		21,805			19,268			2,537
Net realized investment gains (losses)		8,849			(28,673)			37,522
Other income		2,005			2,251			(246)
Total revenues		220,017			196,701			23,316

Expenses:


Net losses and loss adjustment expenses		149,785			164,832			(15,047)
Underwriting, policy acquisition and operating expenses		56,451			62,056			(5,605)
SPC U.S. federal income tax expense		356			222			134
SPC dividend expense (income)		1,742			(508)			2,250
Interest expense		3,212			4,129			(917)

Total expenses		211,546			230,731			(19,185)
Income (loss) before income taxes		8,471			(34,030)			42,501
Income tax expense (benefit)		736			(12,076)			12,812
Net income (loss)		$	7,735		$	(21,954)		$	29,689
Non-GAAP operating income (loss)		$	2,085		$	(1,146)		$	3,231
Earnings (loss) per share:
Basic		$	0.14		$	(0.41)		$	0.55
Diluted		$	0.14		$	(0.41)		$	0.55
Non-GAAP operating income (loss) per share:
Basic		$	0.04		$	(0.02)		$	0.06
Diluted		$	0.04		$	(0.02)		$	0.06
Net loss ratio		79.9		%	80.9		%	(1.0		pts)
Underwriting expense ratio		30.1		%	30.4		%	(0.3		pts)
Combined ratio		110.0		%	111.3		%	(1.3		pts)
Operating ratio		102.0		%	101.1		%	0.9		pts
Effective tax rate		8.7		%	35.5		%	(26.8		pts)
Return on equity*		2.3		%	(6.0		%)	8.3		pts


*Annualized
In all tables that follow, the abbreviation "nm" indicates that the information or the percentage change is not meaningful.

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Executive Summary of Operations

The following sections provide an overview of our consolidated and segment results of operations for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. See the Segment Results sections that follow for additional information regarding each segment's results.

Revenues

The following table shows our consolidated and segment net premiums earned:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Net premiums earned
Specialty P&C			$	115,613	$	120,359	$	(4,746)	(3.9	%)
Workers' Compensation Insurance			40,011		44,515		(4,504)		(10.1	%)
Segregated Portfolio Cell Reinsurance			15,884		16,980		(1,096)		(6.5	%)
Lloyd's Syndicates			15,850		22,001		(6,151)		(28.0	%)
Consolidated total			$	187,358	$	203,855	$	(16,497)	(8.1	%)

All of our operating segments saw a decrease in consolidated net premiums earned during the three months ended March 31, 2021 as compared to the same period of 2020, particularly our Lloyd's Syndicates segment due to our decreased participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%. The decrease in net premiums earned in our Specialty P&C segment was primarily due to our re-underwriting efforts as we continue to emphasize careful risk selection, rate adequacy and a willingness to walk away from business that does not fit our goal of achieving long-term underwriting profit, as well as competitive professional liability market conditions. For both our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the decrease in net premiums earned reflected the competitive workers' compensation market conditions and, for our Workers' Compensation Insurance segment, a decrease in audit premium and a reduction in our EBUB estimate.

The following table shows our consolidated net investment result:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Net investment income			$	15,017	$	20,830	$	(5,813)	(27.9	%)
Equity in earnings (loss) of unconsolidated subsidiaries*			6,788		(1,562)		8,350		534.6	%
Net investment result			$	21,805	$	19,268	$	2,537	13.2	%
*Equity in earnings (loss) of unconsolidated subsidiaries includes our share of the operating results of interests we hold in certain LPs/LLCs as well as operating losses associated with our tax credit partnership investments, which are designed to generate returns in the form of tax credits and tax-deductible project operating losses.

The increase in our consolidated net investment result for the three months ended March 31, 2021 as compared to the same period of 2020 was driven by higher earnings from a few LPs/LLCs, partially offset by lower yields on our corporate debt securities and short-term investments given the actions taken by the Federal Reserve to aggressively reduce interest rates in response to COVID-19 and, to a lesser extent, a decrease in our allocation to equities. Furthermore, the decline in net investment income during the 2021 three-month period reflected the impact of capital planning in anticipation of closing our acquisition of NORCAL.

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Expenses

The following table shows our consolidated and segment net loss ratios and net loss development:


	Three Months Ended March 31
($ in millions)		2021			2020			Change
Current accident year net loss ratio
Consolidated ratio		82.5		%	83.8		%	(1.3		pts)
Specialty P&C		89.8		%	94.2		%	(4.4		pts)
Workers' Compensation Insurance		71.0		%	70.2		%	0.8		pts
Segregated Portfolio Cell Reinsurance		68.9		%	65.7		%	3.2		pts
Lloyd's Syndicates		72.1		%	68.7		%	3.4		pts

Calendar year net loss ratio
Consolidated ratio		79.9		%	80.9		%	(1.0		pts)
Specialty P&C		87.5		%	92.2		%	(4.7		pts)
Workers' Compensation Insurance		65.5		%	66.9		%	(1.4		pts)
Segregated Portfolio Cell Reinsurance		59.3		%	55.1		%	4.2		pts
Lloyd's Syndicates		81.8		%	67.2		%	14.6		pts

Favorable (unfavorable) reserve development, prior accident years
Consolidated		$	4.8		$	6.0		$	(1.2)
Specialty P&C		$	2.7		$	2.4		$	0.3
Workers' Compensation Insurance		$	2.2		$	1.5		$	0.7
Segregated Portfolio Cell Reinsurance		$	1.4		$	1.8		$	(0.4)
Lloyd's Syndicates		$	(1.5)		$	0.3		$	(1.8)

Our consolidated current accident year net loss ratio for the 2021 three-month period decreased by 1.3 percentage points as compared to the same period of 2020 driven by a lower current accident year net loss ratio in our Specialty P&C segment, partially offset by a higher current accident year net loss ratio in our Lloyd's Syndicates and Workers' Compensation Insurance segments. The lower current accident year net loss ratio in our Specialty P&C segment during the 2021 three-month period was primarily due to decreases to certain loss ratios during the current period in our Standard Physician and Specialty lines of business as we continue to recognize the beneficial impacts of our re-underwriting efforts and focus on rate adequacy. The higher current accident year net loss ratio in our Lloyd's Syndicates segment was driven by certain property and catastrophe related losses. For our Workers' Compensation Insurance segment, the higher current accident year net loss ratio was driven by the continuation of intense price competition and the resulting renewal rate decreases and, to a lesser extent, the effect of lower net premiums earned (see previous discussion under the heading "Revenues").

In both the 2021 and 2020 three-month period, our consolidated calendar year net loss ratio was lower than our consolidated current accident year net loss ratio due to the recognition of net favorable prior year reserve development, as shown in the previous table. Consolidated net favorable prior year reserve development recognized in the 2021 three-month period was lower as compared to the same period of 2020 due to unfavorable development recognized in our Lloyd's Syndicates segment driven primarily by catastrophe related losses. In our Specialty P&C segment we continue to have concerns around elevated loss severity in the broader medical professional liability industry. In both our Specialty P&C and Workers' Compensation Insurance segments, we observed a reduction in claims frequency in 2020 that has continued into 2021, some of which is likely associated with the COVID-19 pandemic including the disruption of the court systems. In our Workers' Compensation Insurance segment, we reduced our current accident year loss ratio in 2020 in response to these favorable frequency trends as these claims are shorter-tailed in nature as compared to our HCPL claims. Due to the long-tailed nature of our HCPL claims, we have not yet recognized these favorable frequency trends in our HCPL reserves.

We continue to remain cautious in our evaluation of our reserves in both our Specialty P&C and Workers' Compensation Insurance segments due to the uncertainty surrounding the length and severity of the pandemic. As it relates to our Workers' Compensation Insurance segment, legislative and regulatory bodies in certain states have changed or are considering changing compensability requirements and presumptions for certain types of workers related to COVID-19 claims. Such changes could have an adverse impact on the frequency and severity related to COVID-19 claims in that segment.

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Our consolidated and segment underwriting expense ratios were as follows:


	Three Months Ended March 31
		2021		2020		Change
Underwriting Expense Ratio
Consolidated		30.1	%	30.4	%	(0.3	pts)
Specialty P&C		22.8	%	24.6	%	(1.8	pts)
Workers' Compensation Insurance		30.7	%	31.8	%	(1.1	pts)
Segregated Portfolio Cell Reinsurance		31.6	%	29.9	%	1.7	pts
Lloyd's Syndicates		41.6	%	41.6	%	—	pts
Corporate*		3.8	%	2.4	%	1.4	pts
*There are no net premiums earned associated with the Corporate segment. Ratios shown are the contribution of the Corporate segment to the consolidated ratio (Corporate operating expenses divided by consolidated net premium earned).

Despite the decrease in earned premium in all of our operating segments, as previously discussed, our consolidated underwriting expense ratio for the three months ended March 31, 2021 remained relatively unchanged as compared to the same period of 2020 driven by decreased operating expenses resulting from the operational and structural changes implemented over the past year and a half. Furthermore, the consolidated underwriting expense ratio for the three months ended March 31, 2021 reflected a reduction in employer contributions to the ProAssurance Savings Plan (see Note 17 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K). The favorable impact of these reductions was partially offset by an increase in professional fees in our Corporate segment driven by higher transaction-related costs associated with our acquisition of NORCAL (see Note 8 of the Notes to Condensed Consolidated Financial Statements).

For the three months ended March 31, 2021, the underwriting expense ratios in our Specialty P&C and Corporate segments also reflected the impact of a reduction to the management fee charged to the operating subsidiaries of our Specialty P&C segment by our Corporate segment effective January 1, 2021 (see further discussion in our Segment Results - Specialty Property & Casualty and Segment Results - Corporate sections that follow). This change had no impact to our consolidated underwriting expense ratio.

Taxes

Our provision for income taxes and effective tax rates for the three months ended March 31, 2021 and 2020 were as follows:


($ in thousands)	Three Months Ended March 31
	2021			2020			Change
Income (loss) before income taxes	$	8,471		$	(34,030)		$	42,501		124.9	%
Less: Income tax expense (benefit)	736			(12,076)			12,812			106.1	%
Net income (loss)	$	7,735		$	(21,954)		$	29,689		135.2	%
Effective tax rate	8.7		%	35.5		%	(26.8		pts)

We recognized income tax expense of $0.7 million during the three months ended March 31, 2021 as compared to an income tax benefit of $12.1 million during the same period of 2020; however, the comparability of our effective tax rates is impacted by the consolidated pre-tax income recognized during the 2021 three-month period as compared to the consolidated pre-tax loss recognized in the 2020 three-month period. Our effective tax rates for both the 2021 and 2020 three-month periods were different from the statutory federal income tax rate of 21% primarily due to the benefit recognized from the tax credits transferred to us from our tax credit partnership investments. See further discussion in the Segment Operating Results - Corporate section that follows under the heading "Taxes."

Our projected annual effective tax rate was (38.4 %) as of March 31, 2021 before discrete items were considered and represents an expected tax benefit. Discrete items increased our effective tax rate by 47.1% for the 2021 three-month period mainly due to the treatment of net realized investment gains. This discrete treatment of net realized investment gains of $8.0 million in our Corporate segment for the three months ended March 31, 2021 accounted for an increase of 19.8% in the effective tax rate. Our projected annual effective tax rate as of March 31, 2021 was different from the statutory federal income tax rate of 21% primarily due to the benefit we expect to recognize from the tax credits transferred to us from our tax credit partnership investments. For further discussion in the Segment Results - Corporate section that follows under the heading "Taxes."

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Operating Ratio

Our operating ratio is our combined ratio, less our investment income ratio. This ratio provides the combined effect of underwriting profitability and investment income. Our operating ratio for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended March 31
		2021		2020		Change
Combined ratio		110.0	%	111.3	%	(1.3	pts)
Less: investment income ratio		8.0	%	10.2	%	(2.2	pts)
Operating ratio		102.0	%	101.1	%	0.9	pts

Our operating ratio for the three months ended March 31, 2021 as compared to the same period of 2020 increased approximately 0.9 percentage points driven by a lower investment income ratio, largely offset by a lower combined ratio in our Specialty P&C segment. The lower investment income ratio was primarily due to lower yields on our corporate debt securities and short-term investments given the actions taken by the Federal Reserve in response to COVID-19 and, to a lesser extent, a decrease in our allocation to equities. The lower combined ratio in our Specialty P&C segment was driven by improvement in the current accident year net loss ratio primarily due to our re-underwriting efforts and focus on rate adequacy. See previous discussion in this section under the heading "Expenses" and further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows under the heading "Losses and Loss Adjustment Expenses."

ROE

ROE is calculated as annualized net income (loss) for the period divided by the average of beginning and ending shareholders’ equity. This ratio measures our overall after-tax profitability and shows how efficiently capital is being used. ROE for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended March 31
		2021		2020		Change
ROE		2.3	%	(6.0	%)	8.3	pts

The increase in our ROE for the 2021 three-month period as compared to the same period of 2020 was driven by the change in fair value of our equity portfolio and convertible securities, higher earnings from a few LPS/LLCs and improved underwriting results (see previous discussion in this section under the heading "Investments").

Book Value per Share

Book value per share is calculated as total shareholders’ equity at the balance sheet date divided by the total number of common shares outstanding. This ratio measures the net worth of the Company to shareholders on a per share basis. Our book value per share at March 31, 2021 as compared to December 31, 2020 is shown in the following table.


	Book Value Per Share
Book Value Per Share at December 31, 2020	$	25.04
Increase (decrease) to book value per share during the three months ended March 31, 2021 attributable to:
Dividends declared	(0.05)


Net income (loss)	0.14
OCI(1)	(0.63)
Other(2)	(0.01)
Book Value Per Share at March 31, 2021	$	24.49

(1)Primarily the impact of unrealized investment gains (losses) on our available-for-sale fixed maturity investments. See Note 11 of the Notes to Condensed Consolidated Financial Statements for additional information.

(2)Includes the impact of share-based compensation.

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Non-GAAP Financial Measures

Non-GAAP operating income (loss) is a financial measure that is widely used to evaluate performance within the insurance sector. In calculating Non-GAAP operating income (loss), we have excluded the effects of the items listed in the following table that do not reflect normal results. We believe Non-GAAP operating income (loss) presents a useful view of the performance of our insurance operations, however it should be considered in conjunction with net income (loss) computed in accordance with GAAP.

The following table is a reconciliation of net income (loss) to Non-GAAP operating income (loss):


	Three Months Ended March 31
(In thousands, except per share data)		2021		2020
Net income (loss)		$	7,735	$	(21,954)
Items excluded in the calculation of Non-GAAP operating income (loss):
Net realized investment (gains) losses		(8,849)		28,673
Net realized gains (losses) attributable to SPCs which no profit/loss is retained (1)		789		(2,498)
Transaction-related costs (2)		925		—

Guaranty fund assessments (recoupments)		4		(2)


Pre-tax effect of exclusions		(7,131)		26,173
Tax effect, at 21% (3)		1,481		(5,365)
After-tax effect of exclusions		(5,650)		20,808
Non-GAAP operating income (loss)		$	2,085	$	(1,146)




Per diluted common share:
Net income (loss)		$	0.14	$	(0.41)
Effect of exclusions		(0.10)		0.39
Non-GAAP operating income (loss) per diluted common share		$	0.04	$	(0.02)
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment. SPC results, including any realized gain or loss, that are attributable to external cell participants are reflected in the SPC dividend expense (income). To be consistent with our exclusion of net realized investment gains (losses) recognized in earnings, we are excluding the portion of net realized investment gains (losses) that is included in the SPC dividend expense (income) which is attributable to the external cell participants.
(2) Transaction-related costs associated with our acquisition of NORCAL. Given the significance of these transaction-related costs to the current period, we are excluding these costs as they do not reflect normal operating results and are unique and non-recurring in nature.
(3) The 21% rate is the annual expected statutory tax rate associated with the taxable or tax deductible items listed above. Our effective tax rate for the respective periods was applied to these items in calculating net income (loss), excluding net realized investment gains (losses) and related adjustments. Net realized investment gains (losses) in our Corporate segment are discrete items and are tax affected at the annual expected statutory tax rate (21%) in the period they are included in our consolidated tax provision and net income (loss). See previous discussion in this section under the heading "Taxes." The taxes associated with the net realized investment gains (losses) related to SPCs in our Segregated Portfolio Cell Reinsurance segment are paid by the individual SPCs and are not included in our consolidated tax provision or net income (loss); therefore, both the net realized investment gains (losses) from our Segregated Portfolio Cell Reinsurance segment and the adjustment to exclude the portion of net realized investment gains (losses) included in the SPC dividend expense (income) in the table above are not tax effected.

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Segment Results - Specialty Property & Casualty

Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance as discussed in Note 14 of the Notes to Condensed Consolidated Financial Statements. Segment results reflected pre-tax underwriting profit or loss from these insurance lines. Segment results included the following:


	Three Months Ended March 31
($ in thousands)		2021	2020			Change
Net premiums written			$	121,313		$	131,255		$	(9,942)	(7.6	%)
Net premiums earned			$	115,613		$	120,359		$	(4,746)	(3.9	%)
Other income			469			1,698			(1,229)		(72.4	%)
Net losses and loss adjustment expenses			(101,186)			(110,931)			9,745		(8.8	%)
Underwriting, policy acquisition and operating expenses			(26,346)			(29,585)			3,239		(10.9	%)
Segment results			$	(11,450)		$	(18,459)		$	7,009	38.0	%

Net loss ratio			87.5		%	92.2		%	(4.7 pts)
Underwriting expense ratio			22.8		%	24.6		%	(1.8 pts)

Premiums Written

Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of new business written, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written through multi-period policies. In addition, premium volume may periodically be affected by shifts in the timing of renewals between periods. The professional liability market, which accounts for a majority of the revenues in this segment, remains challenging as physicians continue joining hospitals or larger group practices and are thus no longer purchasing individual or group policies in the standard market. In addition, some competitors have chosen to compete primarily on price; both factors may impact our ability to write new business and retain existing business. Furthermore, the insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition and other periods of reduced competition. The professional liability area has been particularly affected by these cycles. Underwriting cycles are generally driven by an excess of capacity available and actively pursuing business that is deemed profitable. Changes in the frequency and severity of losses may affect the cycles of the insurance and reinsurance markets significantly. During “soft markets” where price competition is high and underwriting profits are poor, growth and retention of business become challenging which may result in reduced premium volumes.

Gross, ceded and net premiums written were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Gross premiums written			$	138,289	$	155,381	$	(17,092)	(11.0	%)
Less: Ceded premiums written			16,976		24,126		(7,150)		(29.6	%)
Net premiums written			$	121,313	$	131,255	$	(9,942)	(7.6	%)

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Gross Premiums Written

During the second quarter of 2020, we reorganized our presentation of gross premiums written by component and related metrics below to better align with the current internal management reporting structure within the segment. All prior period information has been recast to conform to the current period presentation.

Gross premiums written by component were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Professional Liability
HCPL
Standard Physician(1)
Twelve month term			$	52,617	$	56,918	$	(4,301)	(7.6	%)
Twenty-four month term			—		7,366		(7,366)		nm
Total Standard Physician			52,617		64,284		(11,667)		(18.1	%)
Specialty
Custom Physician(2)(10)			15,837		30,399		(14,562)		(47.9	%)
Hospitals and Facilities(3)(10)			16,341		16,357		(16)		(0.1	%)
Senior Care(4)(10)			5,041		3,885		1,156		29.8	%
Reinsurance (assumed)(5)			10,437		4,789		5,648		117.9	%

Total Specialty			47,656		55,430		(7,774)		(14.0	%)
Total HCPL			100,273		119,714		(19,441)		(16.2	%)
Small Business Unit(6)			22,766		22,901		(135)		(0.6	%)
Tail Coverages(7)(10)			8,138		6,189		1,949		31.5	%
Total Professional Liability			131,177		148,804		(17,627)		(11.8	%)
Medical Technology Liability(8)			6,984		6,219		765		12.3	%
Other(9)			128		358		(230)		(64.2	%)
Total			$	138,289	$	155,381	$	(17,092)	(11.0	%)

(1) Standard Physician premium was our greatest source of premium revenues in both 2021 and 2020 and is predominately comprised of twelve month term policies. The decrease in twelve month term policies during the 2021 three-month period was driven by retention losses, partially offset by the conversion of twenty-four month term policies, an increase in renewal pricing and, to a lesser extent, new business written. Renewal pricing increases in 2021 reflect the rising loss cost environment and new business written reflects general market conditions. Retention losses in 2021 were largely attributable to our targeted state strategy to reassess our underwriting appetite in certain unprofitable states. We will continue to perform a detailed evaluation of venues, specialties and other areas to improve our underwriting results. We also continue to focus on underwriting discipline as we emphasize careful risk selection, rate adequacy, improved contract terms and a willingness to walk away from business that does not fit our goal of achieving a long-term underwriting profit. While retention in the current period has recovered somewhat from the impact of our re-underwriting efforts over the past year and a half, it remains lower than our historical average for this line of business as we continue to reevaluate certain states and set our rates to reflect our observations of higher severity trends. Retention losses during the 2021 three-month period also reflected the loss of two large policies totaling $1.4 million due to price competition. Standard Physician premium in the 2020 three-month period also included twenty-four month term premiums that were offered to physician insureds in one selected jurisdiction. We ceased offering twenty-four month term policies beginning in the second quarter of 2020, and the majority of the policies that were up for renewal in the current period were renewed to twelve month term policies; however, a portion of the premium from the 2020 three-month period reflected policies that will be subject to renewal and conversion in 2022.

(2) Custom Physician premium includes large complex physician groups, multi-state physician groups and non-standard physicians and is written primarily on an excess and surplus lines basis. The decrease in premium during the 2021 three-month period as compared to the same period of 2020 was driven by the mutual decision to dissolve our arrangement with CAPAssurance as a result of our acquisition of NORCAL, which resulted in the loss of a large program and two large policies in California totaling $10.2 million. The decrease in Custom Physician premium during the 2021 three-month period also reflected retention losses due to our focus on underwriting discipline as we continue to emphasize careful risk selection, rate adequacy, improved contract terms and a willingness to walk away from business that does not fit our goal

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of achieving a long-term underwriting profit, which resulted in the non-renewal of two large policies totaling $7.3 million. The decrease in Custom Physician premium was partially offset by new business written and, to a lesser extent, an increase in renewal pricing. Renewal pricing increases for the 2021 three-month period reflect the rising loss cost environment and new business written reflects general market conditions. The lower retention for the 2021 three-month period also reflects the aforementioned dissolution of our arrangement with CAPAssurance, which resulted in a decrease to our Specialty retention rate of 22.6 percentage points. We anticipate retention rates to begin to normalize going forward as we substantially completed our re-underwriting efforts as of the end of 2020, except for a large program that was renewed on a two-year term in 2019 that was carefully evaluated and subsequently non-renewed in the current quarter, as previously discussed.

(3) Hospitals and Facilities premium (which includes hospitals, surgery centers and miscellaneous medical facilities) was relatively unchanged during the 2021 three-month period as compared to the same period of 2020 as retention losses were almost entirely offset by new business written, an increase in renewal pricing and, to a lesser extent, net timing differences of $0.5 million. Renewal pricing increases for the 2021 three-month period reflect rate increases and contract modifications that we believe are appropriate given the current loss environment, and new business written reflects general market conditions. Retention losses in the 2021 three-month period were driven by our decision not to renew certain products. As we substantially completed our re-underwriting efforts on certain books of business as of the end of the third quarter of 2020, retention rates have started to normalize.

(4) Senior Care premium includes facilities specializing in long term residential care primarily for the elderly ranging from independent living through skilled nursing. Our Senior Care premium increased for the 2021 three-month period as compared to the same period of 2020 driven by renewal pricing increases and, to a lesser extent, new business written, partially offset by retention losses. The increase in renewal pricing in 2021 was primarily the result of an increase in the rate charged for certain renewed policies in select states. Retention losses in the 2021 three-month period were driven by our decision not to renew certain classes of Senior Care business based on our expectations of poor loss performance. As we completed our re-underwriting efforts on certain books of business during the third quarter of 2020, retention rates have started to normalize.

(5) We offer custom alternative risk solutions including assumed reinsurance. The increase in premium during the 2021 three-month period reflected an assumed reinsurance arrangement with a regional hospital group entered into during the current period, which resulted in $4.5 million of premium written, comprised of $2.3 million of retroactive premium written and fully earned and $2.2 million of prospective premium written. See Note 4 of the Notes to Condensed Consolidated Financial Statements for further information on this transaction. Our custom alternative risk solutions also include premiums assumed on a quota share basis through a strategic partnership since 2016 with an international medical professional liability insurer. For 2021, we increased our participation in the original program and entered into another program with this insurer in a new international territory. Thus, we anticipate the volume of premium assumed through this partnership will grow going forward.

(6) Our Small Business Unit is primarily comprised of premium associated with podiatrists, legal professionals, dentists and chiropractors. Our Small Business Unit premium was relatively unchanged for the 2021 three-month period as compared to the same period of 2020 as retention losses were largely offset by new business written and, to a lesser extent, an increase in renewal pricing. The increase in renewal pricing in 2021 was primarily the result of an increase in the rate charged for certain renewed policies in select states.

(7) We offer extended reporting endorsement or "tail" coverage to insureds who discontinue their claims-made coverage with us, and we also periodically offer tail coverage through stand-alone policies. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. The amount of tail coverage premium written can vary significantly from period to period. The increase during the 2021 three-month period as compared to the same period of 2020 was primarily due to two large tail policies written and fully earned in the current period totaling $2.1 million.

(8) Our Medical Technology Liability business is marketed throughout the U.S.; coverage is typically offered on a primary basis, within specified limits, to manufacturers and distributors of medical technology and life sciences products including entities conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our Medical Technology Liability premium is impacted by the sales volume of insureds. Our Medical Technology Liability premium increased during the 2021 three-month period as compared to the same period of 2020 due to new business written, including the addition of a few large policies totaling $1.1 million, partially offset by retention losses and, to a lesser extent, renewal pricing decreases. Retention losses in the 2021 three-month period are primarily attributable to an increase in competition on terms and pricing. Renewal pricing decreases during the 2021 three-month period are primarily due to changes in the sales volume of certain insureds, including changes in exposure on several renewing policies.

(9) This component of gross premiums written includes all other product lines within our Specialty P&C segment.

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(10) Certain components of our gross premiums written include alternative market premiums. We currently cede either all or a portion of the alternative market premium, net of reinsurance, to three SPCs of our wholly owned Cayman Islands reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance segment (see further discussion in the Ceded Premiums Written section that follows). The portion not ceded to the SPCs is retained within our Specialty P&C segment.


	Three Months Ended March 31
($ in millions)		2021	2020		Change

Custom Physician			$	—	$	0.1	$	(0.1)	nm
Hospitals and Facilities			—		0.1		(0.1)		nm
Senior Care			4.2		3.6		0.6		16.7	%
Tail Coverages			0.3		—		0.3		nm
Total			$	4.5	$	3.8	$	0.7	18.4	%

Alternative market gross premiums written increased during the 2021 three-month period as compared to the same period of 2020 driven by renewal pricing increases, primarily due to an increase in the rate charged for one program and, to a lesser extent, the addition of a tail policy.

We are committed to a rate structure that will allow us to fulfill our obligations to our insureds, while generating competitive long-term returns for our shareholders. Our pricing continues to be based on expected losses as indicated by our historical loss data and available industry loss data. In recent years, this practice has resulted in gradual rate increases and we anticipate further rate increases due to indications of increasing loss severity. Additionally, the pricing of our business includes the effects of filed rates, surcharges and discounts. Renewal pricing also reflects changes in our exposure base, deductibles, self-insurance retention limits and other policy terms and conditions.

The change in renewal pricing for our Specialty P&C segment, including by major component, was as follows:


	Three Months Ended March 31
	2021
Specialty P&C segment	6	%
HCPL
Standard Physician(1)	6	%
Specialty(1)	8	%
Total HCPL	6	%
Small Business Unit(1)	4	%
Medical Technology Liability(1)	(2	%)

(1) See Gross Premiums Written section for further explanation of changes in renewal pricing.

New business written by major component on a direct basis was as follows:


	Three Months Ended March 31
(In millions)		2021		2020
HCPL
Standard Physician		$	0.6	$	0.6
Specialty		8.7		1.9
Total HCPL		9.3		2.5
Small Business Unit		1.0		1.2
Medical Technology Liability		1.8		0.7
Total		$	12.1	$	4.4

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For our Specialty P&C segment, we calculate retention as annualized renewed premium divided by all annualized premium subject to renewal. Retention is affected by a number of factors. We may lose insureds to competitors or to alternative insurance mechanisms such as risk retention groups or self-insurance entities (often when physicians join hospitals or large group practices) or due to pricing or other issues. We may choose not to renew an insured as a result of our underwriting evaluation. Insureds may also terminate coverage because they have left the practice of medicine for various reasons, principally for retirement, death or disability, but also for personal reasons.

Retention for our Specialty P&C segment, including by major component, was as follows:


	Three Months Ended March 31
		2021		2020
Specialty P&C segment		77	%	81	%
HCPL
Standard Physician		86	%	80	%
Specialty(1)		56	%	82	%
Total HCPL		73	%	81	%
Small Business Unit		91	%	85	%
Medical Technology Liability		87	%	78	%
(1) See Gross Premiums Written section for further explanation of retention decline in 2021.

Ceded Premiums Written

Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. For our HCPL and Medical Technology Liability excess of loss reinsurance arrangements in effect prior to October 1, 2020, we generally retained the first $1 million in risk insured by us and ceded coverages in excess of this amount. Effective October 1, 2020, we generally retain the first $2 million in risk insured by us and cede coverages in excess of this amount. For our HCPL coverages, we also retain from 0% to 14.5% of the next $24 million of risk for coverages in excess of $2 million. For our Medical Technology Liability treaty which also renewed effective October 1, 2020, we also retain 2.5% of the next $8 million of risk for coverages in excess of $2 million. These changes in terms for both our HCPL and Medical Technology Liability treaties resulted in a reduction to the gross rate paid for the treaty year effective October 1, 2020. We pay our reinsurers a ceding premium in exchange for their accepting the risk, and in certain of our excess of loss arrangements, the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.

Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable under a reinsurance arrangement are known. As a part of the process of estimating our loss reserve we also make estimates regarding the amounts recoverable under our reinsurance arrangements. As a result, we may have an adjustment to our estimate of expected losses and associated recoveries for prior year ceded losses under certain loss sensitive reinsurance agreements. Any changes to estimates of premiums ceded related to prior accident years are fully earned in the period the changes in estimates occur.

Ceded premiums written were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Excess of loss reinsurance arrangements (1)			$	7,678	$	8,617	$	(939)	(10.9	%)
Other shared risk arrangements (2)			3,963		10,864		(6,901)		(63.5	%)
Premium ceded to SPCs (3)			4,469		3,784		685		18.1	%
Other ceded premiums written			866		861		5		0.6	%

Total ceded premiums written			$	16,976	$	24,126	$	(7,150)	(29.6	%)

(1) We generally reinsure risks under our excess of loss reinsurance arrangements pursuant to which the reinsurers agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the maximum individual limits offered. Premium due to reinsurers also fluctuates with the volume of written premium subject to cession under the arrangement. In certain of our excess of loss reinsurance arrangements, the premium due to the reinsurer is determined by the loss experience of that business reinsured, subject to certain minimum and maximum amounts. The decrease in ceded premiums written under our excess of loss reinsurance arrangements during the 2021 three-month period as compared to

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the same period of 2020 primarily reflected a decrease in the overall volume of gross premiums written subject to cession and, to a lesser extent, the reduced rate on the treaty year effective October 1, 2020.

(2) We have entered into various shared risk arrangements, including quota share, fronting, and captive arrangements, with certain large healthcare systems and other insurance entities. While we cede a large portion of the premium written under these arrangements, they provide us an opportunity to grow net premium through strategic partnerships. These arrangements include our Ascension Health program and, prior to the fourth quarter of 2020, our CAPAssurance program. Our CAPAssurance program was mutually dissolved on October 1, 2020 as a result of our acquisition of NORCAL and their concentration in the state of California. In addition, we entered into a new shared risk arrangement with a regional hospital group during the current period. The decrease in ceded premiums written under our shared risk arrangements during the 2021 three-month period as compared to the same period of 2020 was primarily due to the aforementioned dissolution of our arrangement with CAPAssurance, our non-renewal of two large policies in certain of our other shared risk arrangements effective May 1, 2020 and, to a lesser extent, a decrease in premium ceded to our Ascension Health program, somewhat offset by the premium ceded under our new shared risk arrangement, as previously discussed.

(3) As previously discussed, as a part of our alternative market solutions, all or a portion of certain healthcare premium written is ceded to SPCs in our Segregated Portfolio Cell Reinsurance segment under either excess of loss or quota share reinsurance agreements, depending on the structure of the individual program. See the Segment Results - Segregated Portfolio Cell Reinsurance section for further discussion on the cession to the SPCs from our Specialty P&C segment. The increase in premiums ceded to SPCs during the 2021 three-month period as compared to the same period of 2020 was driven by renewal pricing increases (see discussion in footnote 10 under the heading "Gross Premiums Written").

Ceded Premiums Ratio

The ceded premiums ratio was as follows:


	Three Months Ended March 31
		2021	2020	Change
Ceded premiums ratio		12.3%	15.5%	(3.2 pts)

The decrease in the ceded premiums ratio during the 2021 three-month period was primarily due to a decrease in premiums ceded under our shared risk arrangements and, to a lesser extent, the effect of the aforementioned assumed reinsurance program entered into during the current period with a regional hospital group (increase in gross premiums written with no premium ceded). See further discussion on the assumed reinsurance program in footnote 5 under the heading "Gross Premiums Written" and additional discussion on our shared risk arrangements above under the heading "Ceded Premiums Written."

Net Premiums Earned

Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers for their assumption of a portion of our losses. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year; however, prior to the third quarter of 2020, we wrote certain Standard Physician policies with a twenty-four month term, and a few of our Medical Technology Liability policies have a multi-year term. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. Retroactive coverage premiums are 100% earned at the inception of the contract, as all of the associated underlying loss events occurred in the past. Additionally, any ceded premium changes due to changes to estimates of premiums owed under reinsurance agreements for prior accident years are fully earned in the period of change.

Net premiums earned were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Gross premiums earned			$	132,060	$	139,023	$	(6,963)	(5.0	%)
Less: Ceded premiums earned			16,447		18,664		(2,217)		(11.9	%)
Net premiums earned			$	115,613	$	120,359	$	(4,746)	(3.9	%)

Gross premiums earned during the 2021 three-month period included $2.3 million of retroactive premium written and fully earned associated with an assumed reinsurance program (see previous discussion in footnote 5 under the heading "Gross Premiums Written"). After removing the impact of the retroactive premium, gross premiums earned decreased $9.3 million during the 2021 three-month period as compared to the same period of 2020 driven by the pro rata effect of a decrease in the volume of written premium during the preceding twelve months, predominantly in our Specialty line of business, due to our re-

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underwriting efforts and, to a lesser extent, the dissolution of our arrangement with CAPAssurance, partially offset by two large tail policies written and fully earned in the current period.

The decrease in ceded premiums earned during the 2021 three-month period as compared to the same period of 2020 was driven by the pro rata effect of a decrease in premium ceded under our shared risk and excess of loss arrangements during the preceding twelve months.

Losses and Loss Adjustment Expenses

The determination of calendar year losses involves the actuarial evaluation of incurred losses for the current accident year and the actuarial re-evaluation of incurred losses for prior accident years, including an evaluation of the reserve amounts required for ECO/XPL losses. As part of the review of our prior accident year reserves, we also make estimates of expected losses and associated recoveries for prior year ceded losses under certain loss sensitive reinsurance agreements. This analysis may result in reductions to estimates of premiums owed under reinsurance agreements for prior accident years which impacts net premiums earned (the denominator of the net loss ratio) in the period the adjustment is made; no such adjustments were made during the three months ended March 31, 2021 or 2020. See previous discussion under the heading "Ceded Premiums Written" for additional information.

Accident year refers to the accounting period in which the insured event becomes a liability of the insurer. For claims-made policies, which represent the majority of the premiums written in our Specialty P&C segment, the insured event generally becomes a liability when the event is first reported to us. For occurrence policies, the insured event becomes a liability when the event takes place. For retroactive coverages, the insured event becomes a liability at inception of the underlying contract. We believe that measuring losses on an accident year basis is the best measure of the underlying profitability of the premiums earned in that period, since it associates policy premiums earned with the estimate of the losses incurred related to those policy premiums.

The following table summarizes calendar year net loss ratios by separating losses between the current accident year and all prior accident years.

The net loss ratios for our Specialty P&C segment were as follows:


		Net Loss Ratios (1)
	Three Months Ended March 31
		2021		2020		Change

Calendar year net loss ratio		87.5	%	92.2	%	(4.7	pts)
Less impact of prior accident years on the net loss ratio		(2.3	%)	(2.0	%)	(0.3	pts)
Current accident year net loss ratio(2)		89.8	%	94.2	%	(4.4	pts)

(1)Net losses, as specified, divided by net premiums earned.

(2)For the three months ended March 31, 2021, our current accident year net loss ratio improved 4.4 percentage points as compared to the same period of 2020 driven by decreases to certain loss ratios during the current period in our Standard Physician and Specialty lines of business as we continue to recognize the beneficial impacts of our re-underwriting efforts and focus on rate adequacy.

We re-evaluate our previously established reserve each quarter based upon the most recently completed actuarial analysis supplemented by any new analysis, information or trends that have emerged since the date of that study. We also take into account currently available industry trend information. We observed a reduction in claims frequency in 2020 that has continued into 2021, some of which is likely associated with the COVID-19 pandemic including the disruption of the court systems; however, we continue to remain cautious in recognizing these favorable frequency trends in our current accident year reserve due to the possibility of delays in reporting and uncertainty surrounding the length and severity of the pandemic.

We recognized net favorable prior year reserve development of $2.7 million and $2.4 million for the three months ended March 31, 2021 and 2020, respectively. Development recognized during the three months ended March 31, 2021 principally related to accident years 2017 and 2018. Prior accident year reserve development recognized for the three months ended March 31, 2020 was due to a reduction in our reserve for potential ECO/XPL claims; prior accident year development recognized in the current period included a reduction to this same reserve of $0.2 million.

A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses" and in our December 31, 2020 report on Form 10-K under the same heading. Assumptions used in establishing our reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are reflected in the then current operations. Due to the

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size of our reserve, even a small percentage adjustment to the assumptions can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2021 and 2020.

Underwriting, Policy Acquisition and Operating Expenses

Our Specialty P&C segment underwriting, policy acquisition and operating expenses were comprised as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
DPAC amortization			$	12,396	$	13,916	$	(1,520)	(10.9	%)
Management fees			1,001		1,832		(831)		(45.4	%)
Other underwriting and operating expenses			12,949		13,837		(888)		(6.4	%)
Total			$	26,346	$	29,585	$	(3,239)	(10.9	%)

DPAC amortization decreased for the three months ended March 31, 2021 as compared to the same period of 2020 driven by a decrease in earned premium. In addition, the decrease in DPAC amortization during the 2021 three-month period reflected a decrease in compensation-related expenses driven by a reduction in headcount as a result of the 2020 organizational restructuring. Partially offsetting the decrease in DPAC amortization for the 2021 three-month period was a decrease in ceding commission income, which is an offset to expense, from certain of our shared risk arrangements.

Management fees are charged pursuant to a management agreement by the Corporate segment to the operating subsidiaries within our Specialty P&C segment for services provided based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary. Fluctuations in the amount of premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period. Due to organizational structure enhancements in our Specialty P&C segment during 2020, the extent to which services are provided by the Corporate segment to the operating subsidiaries within the segment decreased effective January 1, 2021. Accordingly, we reduced the fee charged to the segment's operating subsidiaries during the 2021 three-month period.

Other underwriting and operating expenses decreased during the 2021 three-month period as compared to the same period of 2020 driven by decreased operating expenses resulting from the operational and structural changes implemented over the past year and a half. The decrease in operating expenses during the 2021 three-month period also reflected the effect of $1.4 million of one-time expenses incurred during the prior year period primarily related to the restructuring of our HCPL field office organization and, to a lesser extent, a decrease in employer contributions to the ProAssurance Savings Plan in the current period (see Note 17 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K). The remaining variance in other underwriting and operating expenses for the 2021 three-month period as compared to the same period of 2020 was comprised of individually insignificant components.

Underwriting Expense Ratio (the Expense Ratio)

Our expense ratio for the Specialty P&C segment was as follows:


	Three Months Ended March 31
		2021		2020		Change
Underwriting expense ratio		22.8	%	24.6	%	(1.8	pts)

The underwriting expense ratio in the current period also included the effect of one-time retroactive premium earned associated with a new assumed reinsurance program (net premiums earned with no associated operating expenses). Excluding the impact of the retroactive premium, the expense ratio for the 2021 three-month period was 23.2% which reflects the impact of a reduction to the management fee charged by the Corporate segment, as previously discussed, as well as a decrease in various operational expenses resulting from improvements over the past year including organizational structure enhancements and improved operating efficiencies. The underwriting expense ratio for the three months ended March 31, 2020 also reflected the effect of one-time expenses related to our HCPL field office reorganization which increased the expense ratio by 1.2 percentage points in the prior year period.

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Segment Results - Workers' Compensation Insurance

Our Workers' Compensation Insurance segment includes workers' compensation products provided to employers generally with 1,000 or fewer employees, as discussed in Note 14 of the Notes to Condensed Consolidated Financial Statements. Workers' compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market programs. Alternative market programs include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market program premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer for one program. Our Workers' Compensation Insurance segment results reflected pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which are included in our Corporate segment. Segment results included the following:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Net premiums written			$	46,884	$	50,312	$	(3,428)	(6.8	%)

Net premiums earned			$	40,011	$	44,515	$	(4,504)	(10.1	%)
Other income			392		757		(365)		(48.2	%)
Net losses and loss adjustment expenses			(26,207)		(29,769)		3,562		(12.0	%)
Underwriting, policy acquisition and operating expenses			(12,286)		(14,164)		1,878		(13.3	%)
Segment results			$	1,910	$	1,339	$	571	42.6	%

Net loss ratio			65.5%		66.9%		(1.4 pts)
Underwriting expense ratio			30.7%		31.8%		(1.1 pts)

Premiums Written

Our workers’ compensation premium volume is driven by five primary factors: (1) the amount of new business written, (2) retention of our existing book of business, (3) premium rates charged on our renewal book of business, (4) changes in payroll exposure and (5) audit premium.

Gross, ceded and net premiums written were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Gross premiums written			$	72,328	$	79,243	$	(6,915)	(8.7	%)
Less: Ceded premiums written			25,444		28,931		(3,487)		(12.1	%)
Net premiums written			$	46,884	$	50,312	$	(3,428)	(6.8	%)

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Gross Premiums Written

Gross premiums written by product were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Traditional business:
Guaranteed cost			$	38,196	$	42,062	$	(3,866)	(9.2	%)
Policyholder dividend			7,520		8,031		(511)		(6.4	%)
Deductible			2,052		1,926		126		6.5	%
Retrospective(1)			455		344		111		32.3	%
Other			1,600		1,781		(181)		(10.2	%)
Alternative market business(2)			23,715		25,959		(2,244)		(8.6	%)
Change in EBUB estimate			(1,210)		(860)		(350)		40.7	%
Total			$	72,328	$	79,243	$	(6,915)	(8.7	%)

(1) The change in retrospectively-related policies included adjustments that decreased premium by $0.1 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively.

(2) A majority of alternative market premiums are ceded to SPCs in our Segregated Portfolio Cell Reinsurance segment. See further discussion on alternative market gross premiums written in our Segment Operating Results - Segregated Portfolio Cell Reinsurance section under the heading "Gross Premiums Written" that follows.

Gross premiums written decreased during the three months ended March 31, 2021 as compared to the same period of 2020, which primarily reflected a decrease in audit premium, a reduction of our EBUB estimate and the continuation of competitive market conditions. Policy audits processed during the first quarter of 2021 resulted in audit premium returned to policyholders totaling $0.8 million as compared to audit premium billed to policyholders of $0.9 million for the same period of 2020. In addition, we reduced our EBUB estimate by $1.2 million and $0.9 million during the three months ended March 31, 2021 and 2020, respectively. The decrease in audit premium processed as well as the reduction of our EBUB estimate primarily reflected the impact of COVID-19 on both actual and expected final payroll audits for policies written prior to the onset of the pandemic in 2020. The competitive market conditions resulted in renewal rate decreases of 3% for the three months ended March 31, 2021 as compared to 4% during the same period of 2020. Additionally, new business written decreased $2.4 million for the three months ended March 31, 2021 as compared to the same period of 2020. The renewal rate decreases and reduction in new business were partially offset by an improvement in renewal retention, which was 90% for the three months ended March 31, 2021 as compared to 83% for the same period in 2020. The 2020 renewal retention was impacted by the reduction in premium funding for a large alternative market program. We retained 100% of the nine workers’ compensation alternative market programs that were up for renewal during the first quarter of 2021.

New business, audit premium, retention and renewal price changes for both the traditional business and the alternative market business are shown in the table below:










	Three Months Ended March 31
	2021									2020
($ in millions)	Traditional Business			Alternative Market Business			Segment Results			Traditional Business			Alternative Market Business			Segment Results
New business	$	5.9		$	0.8		$	6.7		$	8.0		$	1.1		$	9.1
Audit premium (including EBUB)	$	(2.2)		$	0.2		$	(2.0)		$	0.3		$	(0.3)		$	—
Retention rate (1)	89		%	92		%	90		%	85		%	78		%	83		%
Change in renewal pricing (2)	(2		%)	(5		%)	(3		%)	(4		%)	(6		%)	(4		%)

(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium divided by all annualized expiring premium subject to renewal. Our retention rate can be impacted by various factors, including price or other competitive issues, insureds being acquired, or a decision not to renew based on our underwriting evaluation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and market conditions. We continue to base our pricing on expected losses, as indicated by our historical loss data.

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Ceded Premiums Written

Ceded premiums written were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Premiums ceded to SPCs			$	20,682	$	23,356	$	(2,674)	(11.4	%)
Premiums ceded to external reinsurers			2,974		3,245		(271)		(8.4	%)
Premiums ceded to unaffiliated captive insurer			3,033		2,603		430		16.5	%
Change in return premium estimate under external reinsurance			(474)		31		(505)		(1,629.0	%)
Estimated revenue share			(771)		(304)		(467)		153.6	%
Total ceded premiums written			$	25,444	$	28,931	$	(3,487)	(12.1	%)

Premiums ceded to SPCs represents alternative market business that is ceded under 100% quota share reinsurance agreements to the SPCs in our Segregated Portfolio Cell Reinsurance segment. Premiums ceded to the unaffiliated captive insurer reflect the alternative market business that is ceded under a 100% quota share reinsurance agreement for one program. The decrease for the three months ended March 31, 2021 primarily reflects the competitive workers' compensation market conditions.

Under our external reinsurance agreement for traditional business, we retain the first $0.5 million in risk insured by us and cede losses in excess of this amount on each loss occurrence under our primary external reinsurance treaty, subject to an AAD, equal to 3.16% of ceded earned premium. Per our reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis. The decrease in premiums ceded to external reinsurers during the 2021 three-month period primarily reflected the decrease in traditional earned premium, partially offset by an increase in reinsurance rates.

Changes in the return premium estimate reflected adjustments to our estimate of expected future recovery of ceded premium based on the underlying loss experience of our reinsurance contracts that include a provision for return premium. We increased our estimate of return premium by $0.5 million during the three months ended March 31, 2021, as compared to a nominal decrease in our estimate for the same period in 2020. The change in estimated return premium for the three months ended March 31, 2021 primarily reflected favorable prior year loss development on previously reported reinsured claims.

Our reinsurance program includes a revenue share agreement with our reinsurance broker under which we share in the broker's revenue above an agreed upon minimum retention. We increased our estimate of the revenue share with our reinsurance broker related to the current contract year during the three months ended March 31, 2021, reflecting an increase in the ceded premium under the reinsurance treaties.

Ceded Premiums Ratio

Ceded premiums ratio was as follows:


	Three Months Ended March 31
		2021		2020		Change
Ceded premiums ratio, as reported		31.8	%	32.2	%	(0.4	pts)
Less the effect of:
Premiums ceded to SPCs (100%)		25.9	%	24.7	%	1.2	pts

Premiums ceded to unaffiliated captive insurers (100%)		1.7	%	1.2	%	0.5	pts
Change in EBUB		0.1	%	0.1	%	—	pts
Change in return premium estimate under external reinsurance		(1.1	%)	0.1	%	(1.2	pts)
Estimated revenue share		(1.8	%)	(0.6	%)	(1.2	pts)
Assumed premiums earned (not ceded to external reinsurers)		(0.3	%)	(0.2	%)	(0.1	pts)
Ceded premiums ratio (related to external reinsurance), less the effects of above		7.3	%	6.9	%	0.4	pts

The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede premiums related to our traditional business to external reinsurers on an earned premium basis. The increase in the ceded premiums ratio for the three months ended March 31, 2021 as compared to the same period in 2020 primarily reflects the increase in reinsurance rates for the contract period beginning May 1, 2020.

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Net Premiums Earned

Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to SPCs in our Segregated Portfolio Cell Reinsurance segment, external reinsurers and the unaffiliated captive insurer. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Our workers’ compensation policies are twelve month term policies, and premiums are earned on a pro rata basis over the policy period. Net premiums earned also include premium adjustments related to the audit of our insureds' payrolls, changes in our EBUB estimate and premium adjustments related to retrospectively-rated policies. Payroll audits are conducted subsequent to the end of the policy period and any related adjustments are recorded as fully earned in the current period. In addition, we record an estimate for EBUB and evaluate the estimate on a quarterly basis.

Net premiums earned were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Gross premiums earned			$	58,632	$	65,613	$	(6,981)	(10.6	%)
Less: Ceded premiums earned			18,621		21,098		(2,477)		(11.7	%)
Net premiums earned			$	40,011	$	44,515	$	(4,504)	(10.1	%)

The decrease in net premiums earned during the three months ended March 31, 2021 as compared to the same period of 2020 primarily reflected the pro rata effect of a reduction in net premiums written during the preceding twelve months, a decrease in audit premium and, to a lesser extent, the reduction in our EBUB estimate, partially offset by an increase in broker revenue sharing and, to a lesser extent, return premium estimates under our reinsurance contracts. We reduced our EBUB estimate by $1.2 million and $0.9 million during the three months ended March 31, 2021 and 2020, respectively. The reduction in our EBUB estimate during the current period primarily reflected the impact of COVID-19 on both actual and expected final payroll audits for policies written prior to the onset of the pandemic in 2020. Please see "Item 1A, Risk Factors" in our December 31, 2020 report on Form 10-K for additional information on the economic impact of COVID-19.

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Losses and Loss Adjustment Expenses

We estimate our current accident year loss and loss adjustment expenses based on an expected loss ratio. Incurred losses and loss adjustment expenses for the current accident year are determined by applying the expected loss ratio to net premiums earned for the respective period. The following table summarizes calendar year net loss ratios by separating losses between the current accident year and all prior accident years. Calendar year and current accident year net loss ratios by component were as follows:


	Three Months Ended March 31
		2021		2020		Change
Calendar year net loss ratio		65.5	%	66.9	%	(1.4	pts)
Less impact of prior accident years on the net loss ratio		(5.5	%)	(3.3	%)	(2.2	pts)
Current accident year net loss ratio		71.0	%	70.2	%	0.8	pts

The increase in the current accident year net loss ratio for the three months ended March 31, 2021 primarily reflected the continuation of intense price competition and the resulting renewal rate decreases as well as the effect of lower net premiums earned driven by a reduction in audit premium and our EBUB estimate, as previously discussed. The increase in the current accident year loss ratio was partially offset by favorable claim trends in prior accident year claim results and their impact on our analysis of the current accident year loss estimate. As a result of the COVID-19 pandemic, legislative and regulatory bodies in certain states have changed or are considering changes to compensability requirements and presumptions for certain types of workers related to COVID-19 claims. Such changes could have an adverse impact on the frequency and severity related to COVID-19 claims.

Calendar year incurred losses (excluding IBNR) ceded to our external reinsurers decreased $0.5 million for the three months ended March 31, 2021 as compared to the same period of 2020. There were no current accident year ceded incurred losses (excluding IBNR) during the three months ended March 31, 2021 or 2020, reflecting lower claim severity and the impact of the AAD (see previous discussion under the heading "Ceded Premiums Written"). The decrease in ceded incurred losses for

the three months ended March 31, 2021 reflects favorable development on prior accident year reinsured claims.

We recognized net favorable prior year development related to our previously established reserve of $2.2 million and $1.5 million for the three months ended March 31, 2021 and 2020, respectively. The net favorable prior year reserve development for the three months ended March 31, 2021 and 2020 reflected overall favorable trends in claim closing patterns. Net favorable development for the 2021 three-month period was primarily related to the 2017 accident year and prior. Net favorable development for the 2020 three-month period was related to the 2015 and 2016 accident years.

Underwriting, Policy Acquisition and Operating Expenses

Underwriting, policy acquisition and operating expenses includes the amortization of commissions, premium taxes and underwriting salaries, which are capitalized and deferred over the related workers’ compensation policy period, net of ceding commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our contract acquisition efforts. These expenses also include a management fee charged by our Corporate segment, which represents intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily related to the acquisition of Eastern by ProAssurance. The management fee is based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary.

Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
DPAC amortization			$	6,741	$	7,850	$	(1,109)	(14.1	%)
Management fees			542		601		(59)		(9.8	%)
Other underwriting and operating expenses			8,521		10,032		(1,511)		(15.1	%)
SPC ceding commission offset			(3,518)		(4,319)		801		(18.5	%)
Total			$	12,286	$	14,164	$	(1,878)	(13.3	%)

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The decrease in DPAC amortization for the three months ended March 31, 2021 as compared to the same period in 2020 primarily reflects the decrease in net premiums earned. The decrease in other underwriting and operating expenses for the three months ended March 31, 2021 as compared to the same period of 2020 primarily reflected a decrease in compensation-related costs and, to a lesser extent, a decrease in travel-related costs related to the COVID-19 pandemic. The decrease in compensation-related costs during the 2021 three-month period was driven by a reduction in headcount as a result of the 2020 organizational restructuring and, to a lesser extent, a decrease in employer contributions to the ProAssurance Savings Plan (see Note 17 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K).

As previously discussed, alternative market premiums written through our Workers' Compensation Insurance segment's alternative market business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer. The ceding commission consists of an amount for fronting fees, cell rental fees, commissions, premium taxes and risk management fees. The fronting fees, commissions, premium taxes and risk management fees are recorded as an offset to underwriting, policy acquisition and operating expenses. Cell rental fees are recorded as a component of other income and claims administration fees are recorded as ceded ULAE. The decrease in SPC ceding commissions earned for the three months ended March 31, 2021 as compared to the same respective period of 2020, primarily reflects the decrease in alternative market ceded earned premium.

Underwriting Expense Ratio (the Expense Ratio)

The underwriting expense ratio included the impact of the following:


	Three Months Ended March 31
		2021		2020		Change
Underwriting expense ratio, as reported		30.7	%	31.8	%	(1.1	pts)
Less estimated ratio increase (decrease) attributable to:
Impact of ceding commissions received from SPCs		2.9	%	2.3	%	0.6	pts
Retrospective premium adjustment		—	%	0.1	%	(0.1	pts)
Impact of audit premium		1.0	%	(0.2	%)	1.2	pts
Change in return premium estimate under external reinsurance		(0.2	%)	—	%	(0.2	pts)
Estimated revenue share		(0.4	%)	(0.1	%)	(0.3	pts)
Underwriting expense ratio, less listed effects		27.4	%	29.7	%	(2.3	pts)

Excluding the items noted in the table above, the expense ratio decreased for the three months ended March 31, 2021, primarily reflecting the decrease in compensation-related costs and, to a lesser extent, travel-related costs, partially offset by the decrease in net premiums earned.

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Segment Results - Segregated Portfolio Cell Reinsurance

The Segregated Portfolio Cell Reinsurance segment includes the results (underwriting profit or loss, plus investment results, net of U.S. federal income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations, as discussed in Note 14 of the Notes to Condensed Consolidated Financial Statements. SPCs are segregated pools of assets and liabilities that provide an insurance facility for a defined set of risks. Assets of each SPC are solely for the benefit of that individual cell and each SPC is solely responsible for the liabilities of that individual cell. Assets of one SPC are statutorily protected from the creditors of the others. Each SPC is owned, fully or in part, by an agency, group or association and the results of the SPCs are attributable to the participants of that cell. We participate to a varying degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest ranges from a low of 20% to a high of 85%. SPC results attributable to external cell participants are reported as an SPC dividend (expense) income in our Segregated Portfolio Cell Reinsurance segment. In addition, our Segregated Portfolio Cell Reinsurance segment includes the investment results of the SPCs as the investments are solely for the benefit of the cell participants and investment results attributable to external cell participants are reflected in the SPC dividend (expense) income. As of March 31, 2021, there were 27 (3 inactive) SPCs. The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from our Workers' Compensation Insurance and Specialty P&C segments. As of March 31, 2021, there were two SPCs that assumed both workers' compensation insurance and healthcare professional liability insurance and one SPC that assumed only healthcare professional liability insurance.

Segment results reflects our share of the underwriting and investment results of the SPCs in which we participate, and included the following:


	Three Months Ended March 31
($ in thousands)		2021	2020			Change
Net premiums written			$	22,188		$	23,990		$	(1,802)	(7.5	%)

Net premiums earned			$	15,884		$	16,980		$	(1,096)	(6.5	%)
Net investment income			221			254			(33)		(13.0	%)
Net realized gains (losses)			987			(3,207)			4,194		130.8	%
Other income			1			136			(135)		(99.3	%)
Net losses and loss adjustment expenses			(9,425)			(9,352)			(73)		0.8	%
Underwriting, policy acquisition and operating expenses			(5,025)			(5,079)			54		(1.1	%)
SPC U.S. federal income tax expense (1)			(356)			(222)			(134)		60.4	%
SPC net results			2,287			(490)			2,777		566.7	%
SPC dividend (expense) income (2)			(1,742)			508			(2,250)		442.9	%
Segment results (3)			$	545		$	18		$	527	2,927.8	%

Net loss ratio			59.3		%	55.1		%	4.2 pts
Underwriting expense ratio			31.6		%	29.9		%	1.7 pts
(1) Represents the provision for U.S. federal income taxes for SPCs at Inova Re, which have elected to be taxed as a U.S. corporation under Section 953(d) of the Internal Revenue Code. U.S. federal income taxes are included in the total SPC net results and are paid by the individual SPCs.
(2) Represents the net (profit) loss attributable to external cell participants.
(3) Represents our share of the net profit (loss) of the SPCs in which we participate.

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Premiums Written

Premiums in our Segregated Portfolio Cell Reinsurance segment are assumed from either our Workers' Compensation Insurance or Specialty P&C segments. Premium volume is driven by five primary factors: (1) the amount of new business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and, for workers' compensation business, (4) changes in payroll exposure and (5) audit premium.

Gross, ceded and net premiums written were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Gross premiums written			$	25,151	$	27,140	$	(1,989)	(7.3	%)
Less: Ceded premiums written			2,963		3,150		(187)		(5.9	%)
Net premiums written			$	22,188	$	23,990	$	(1,802)	(7.5	%)

Gross Premiums Written

Gross premiums written reflected reinsurance premiums assumed by component as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Workers' compensation			$	20,682	$	23,356	$	(2,674)	(11.4	%)
Healthcare professional liability			4,469		3,784		685		18.1	%

Gross Premiums Written			$	25,151	$	27,140	$	(1,989)	(7.3	%)

Gross premiums written for the three months ended March 31, 2021 and 2020 were primarily comprised of workers' compensation coverages assumed from our Workers' Compensation Insurance segment. The decrease in workers' compensation gross premiums written during the three months ended March 31, 2021 as compared to the same period in 2020 primarily reflected the competitive workers’ compensation market conditions and the resulting renewal rate decreases of 5%, partially offset by an improvement in the renewal retention rate. The renewal retention rate for the three months ended March 31, 2020 included the impact of a reduction in premium funding for a large workers' compensation alternative market program. We do not participate in this program; therefore, the reduction in premium funding had no effect on the segment results for the three months ended March 31, 2020. The increase in healthcare professional liability gross premiums written during the three months ended March 31, 2021 as compared to the same period in 2020 was driven by renewal pricing increases, primarily due to increases in exposure for one program. We retained 100% of the eight workers' compensation programs and one healthcare professional liability program up for renewal during the three months ended March 31, 2021.

New business, audit premium, retention and renewal price changes for the assumed workers' compensation premium is shown in the table below:


	Three Months Ended March 31
($ in millions)		2021			2020
New business		$	0.8		$	1.1
Audit premium (including EBUB)		$	0.2		$	(0.3)
Retention rate (1)		92		%	78		%
Change in renewal pricing (2)		(5		%)	(6		%)
(1) We calculate our workers' compensation retention rate as annualized expiring renewed premium divided by all annualized expiring premium subject to renewal. Our retention rate can be impacted by various factors, including price or other competitive issues, insureds being acquired, or a decision not to renew based on our underwriting evaluation.
(2) The pricing of our business includes an assessment of the underlying policy exposure and market conditions. We continue to base our pricing on expected losses, as indicated by our historical loss data.

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Ceded Premiums Written

Ceded premiums written were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Ceded premiums written			$	2,963	$	3,150	$	(187)	(5.9	%)

For the workers' compensation business, each SPC has in place its own external reinsurance arrangements. The healthcare professional liability business is assumed net of reinsurance from our Specialty P&C segment; therefore, there are no ceded premiums related to the healthcare professional liability business reflected in the table above. The risk retention for each loss occurrence for the workers' compensation business ranges from $0.3 million to $0.4 million based on the program, with limits up to $119.7 million. In addition, each program has aggregate reinsurance coverage between $1.1 million and $2.1 million on a program year basis. Per the SPC external reinsurance agreements, premiums are ceded on a written premium basis. The decrease in ceded premiums written during the three months ended March 31, 2021 as compared to the same period of 2020, was driven by a decrease in workers' compensation gross premiums written, and was partially offset by an increase in reinsurance rates for programs with renewal dates on or after May 1, 2020. External reinsurance rates vary based on the alternative market program.

Ceded Premiums Ratio

Ceded premiums ratio was as follows:


	Three Months Ended March 31
		2021	2020	Change
Ceded premiums ratio		14.3%	13.5%	0.8 pts

The above table reflects ceded premiums as a percent of gross premiums written for the workers' compensation business only; healthcare professional liability business is assumed net of reinsurance, as discussed above. The ceded premiums ratio reflects the weighted average reinsurance rates of all SPC programs. The increase in the ceded premiums ratio for the three months ended March 31, 2021 primarily reflects an increase in reinsurance rates for programs renewing on or after May 1, 2020.

Net Premiums Earned

Net premiums earned consist of gross premiums earned less the portion of earned premiums that the SPCs cede to external reinsurers. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Policies ceded to the SPCs are twelve month term policies and premiums are earned on a pro rata basis over the policy period. Net premiums earned also include premium adjustments related to the audit of workers' compensation insureds' payrolls. Payroll audits are conducted subsequent to the end of the policy period and any related adjustments are recorded as fully earned in the current period.

Gross, ceded and net premiums earned were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Gross premiums earned			$	17,967	$	19,190	$	(1,223)	(6.4	%)
Less: Ceded premiums earned			2,083		2,210		(127)		(5.7	%)
Net premiums earned			$	15,884	$	16,980	$	(1,096)	(6.5	%)

The decrease in net premiums earned during the three months ended March 31, 2021 primarily reflected the pro rata effect of a reduction in net premiums written during the preceding twelve months.

Net Investment Income and Net Realized Investment Gains (Losses)

Net investment income for the three months ended March 31, 2021 and 2020 was primarily attributable to interest earned on available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. We recognized $1.0 million of net realized investment gains during the three months ended March 31, 2021, which primarily reflected an increase in the fair value on our equity portfolio. We recognized $3.2 million of net realized investment losses during the three months ended March 31, 2020 driven by changes in the fair value of our equity portfolio attributable to the disruptions in global financial markets related to COVID-19.

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Losses and Loss Adjustment Expenses

The following table summarizes the calendar year net loss ratios by separating losses between the current accident year and all prior accident years. The current accident year net loss ratio reflected the aggregate loss ratio for all programs. Loss reserves are estimated for each program on a quarterly basis. Due to the size of some of the programs, quarterly loss results can create volatility in the current accident year net loss ratio from period to period.

Calendar year and current accident year net loss ratios for the three months ended March 31, 2021 and 2020 was as follows:


	Three Months Ended March 31
	2021		2020		Change
Calendar year net loss ratio	59.3	%	55.1	%	4.2	pts
Less impact of prior accident years on the net loss ratio	(9.6	%)	(10.6	%)	1.0	pts
Current accident year net loss ratio	68.9	%	65.7	%	3.2	pts

The increase in the current accident year net loss ratio for the 2021 three-month period of 3.2 percentage points as compared to the same period of 2020 primarily reflected the continuation of intense price competition and the resulting renewal rate decreases in the workers' compensation business. As a result of the COVID-19 pandemic, legislative and regulatory bodies in certain states have changed or are considering changes to compensability requirements and presumptions for certain types of workers related to COVID-19 claims. Such changes could have an adverse impact on the frequency and severity related to COVID-19 claims.

Calendar year incurred losses (excluding IBNR) ceded to our external reinsurers increased $3.1 million for the 2021 three-month period as compared to the same period of 2020, primarily reflecting the impact of three large claims reported in the first quarter of 2021 that occurred in late 2020. Current accident year ceded incurred losses (excluding IBNR) decreased $0.4 million for the 2021 three-month period, as compared to the same period of 2020.

We recognized net favorable prior year reserve development of $1.4 million and $1.8 million for the three months ended March 31, 2021 and 2020, respectively. The net favorable prior year reserve development for the three months ended March 31, 2021 related entirely to workers’ compensation business, which primarily reflected overall favorable trends in claim closing patterns primarily in the 2018 and 2019 accident years. The net favorable prior year development for the three months ended March 31, 2020 included $0.8 million and $1.0 million related to the workers' compensation and healthcare professional liability business, respectively. The workers' compensation favorable development was primarily related to the 2018 accident year, while the healthcare professional liability favorable development was primarily related to the 2016 through 2018 accident years.

Underwriting, Policy Acquisition and Operating Expenses

Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were comprised as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
DPAC amortization			$	4,636	$	5,135	$	(499)	(9.7	%)
Other underwriting and operating expenses			389		(56)		445		794.6	%
Total			$	5,025	$	5,079	$	(54)	(1.1	%)

DPAC amortization primarily represents ceding commissions, which vary by program and are paid to our Workers' Compensation Insurance and Specialty P&C segments for premiums assumed. Ceding commissions include an amount for fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and operating expenses within our Workers' Compensation Insurance and Specialty P&C segments. In addition, ceding commissions paid to our Workers' Compensation Insurance segment include cell rental fees which are recorded as other income within our Workers' Compensation Insurance segment.

Other underwriting and operating expenses primarily include bank fees, professional fees and bad debt expense. The increase in other underwriting and operating expenses for the three months ended March 31, 2021 as compared to the same period in 2020 primarily reflected the effect of recoveries of premiums receivables during the first quarter of 2020 that were previously written off, which resulted in a reduction to our allowance for expected credit losses and, to a lesser extent, an increase in policyholder dividend expense related to one SPC program.

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Underwriting Expense Ratio (the Expense Ratio)

The underwriting expense ratio included the impact of the following:


	Three Months Ended March 31
		2021	2020	Change
Underwriting expense ratio, as reported		31.6%	29.9%	1.7 pts
Less: impact of audit premium on expense ratio		(0.3%)	0.6%	(0.9 pts)


Underwriting expense ratio, excluding the effect of audit premium		31.9%	29.3%	2.6 pts

Excluding the effect of audit premium, the increase in the underwriting expense ratio during the 2021 three-month period primarily reflected the effect of the aforementioned premiums receivable recoveries during the first quarter of 2020 and the increase in policyholder dividend expense, partially offset by a decrease in the weighted average ceding commission percentage of all SPC programs.

SPC U.S. Federal Income Tax Expense

The SPCs at Inova Re have made a 953(d) election under the U.S. Internal Revenue Code and are subject to U.S. federal income tax. U.S. federal income taxes incurred totaled $0.4 million and $0.2 million for the three months ended March 31, 2021 and 2020, respectively. U.S. federal income taxes are included in the total SPC net results and are paid by the individual SPCs.

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Segment Results - Lloyd's Syndicates

Our Lloyd's Syndicates segment includes the results from our participation in certain Syndicates at Lloyd's of London. In addition to our participation in Syndicate results, we have investments in and other obligations to our Lloyd's Syndicates consisting of a Syndicate Credit Agreement and FAL requirements. For the 2021 underwriting year, our FAL was comprised of investment securities and cash and cash equivalents deposited with Lloyd's which at March 31, 2021 had a fair value of approximately $106.8 million, as discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements.

We normally report results from our involvement in Lloyd's Syndicates on a quarter lag, except when information is available that is material to the current period. Furthermore, the investment results associated with our FAL investments and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame.

Lloyd's Syndicate 1729. We provide capital to Syndicate 1729, which covers a range of property and casualty insurance and reinsurance lines in both the U.S. and international markets. The remaining capital for Syndicate 1729 is provided by unrelated third parties, including private names and other corporate members. To support and grow our core insurance operations, we decreased our participation in the results of Syndicate 1729 for the 2021 underwriting year to 5% from 29% which, due to the quarter lag, will not be reflected in our results until the second quarter of 2021. Syndicate 1729's maximum underwriting capacity for the 2021 underwriting year is £185 million (approximately $255 million based on March 31, 2021 exchange rates), of which £9 million (approximately $13 million based on March 31, 2021 exchange rates) is our allocated underwriting capacity.

Lloyd's Syndicate 6131. We provide capital to an SPA, Syndicate 6131, which focuses on contingency and specialty property business, primarily for risks in both U.S. and international markets. As an SPA, Syndicate 6131 underwrites on a quota share basis with Syndicate 1729. Effective July 1, 2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an unaffiliated insurer. Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and we decreased our participation in the results of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due to the quarter lag, this reduced participation will not be reflected in our results until the second quarter of 2021. Syndicate 6131's maximum underwriting capacity for the 2021 underwriting year is £20 million (approximately $28 million based on March 31, 2021 exchange rates), of which £10 million (approximately $14 million based on March 31, 2021 exchange rates) is our allocated underwriting capacity.

In addition to the results of our participation in Lloyd's Syndicates, as discussed above, our Lloyd's Syndicates segment also includes 100% of the results of our wholly owned subsidiaries that support our operations at Lloyd's. For the three months ended March 31, 2021 and 2020, the results of our Lloyd's Syndicates segment were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020			Change


Net premiums written			$	11,885		$	26,660		$	(14,775)		(55.4	%)
Net premiums earned			$	15,850		$	22,001		$	(6,151)		(28.0	%)
Net investment income			729			1,159			(430)			(37.1	%)
Net realized gains (losses)			(115)			81			(196)			(242.0	%)
Other income (loss)			221			(232)			453			195.3	%
Net losses and loss adjustment expenses			(12,967)			(14,780)			1,813			(12.3	%)
Underwriting, policy acquisition and operating expenses			(6,591)			(9,142)			2,551			(27.9	%)
Income tax benefit (expense)			—			29			(29)			nm
Segment results			$	(2,873)		$	(884)		$	(1,989)		(225.0	%)
Net loss ratio			81.8		%	67.2		%	14.6		pts
Underwriting expense ratio			41.6		%	41.6		%	—		pts

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Premiums Written

Changes in our premium volume within our Lloyd's Syndicates segment are driven by five primary factors: (1) changes in our participation in the Syndicates, (2) the amount of new business and the channels in which the business is written, (3) our retention of existing business, (4) the premium charged for business that is renewed, which is affected by rates charged and by the amount and type of coverage an insured chooses to purchase, and (5) the timing of premium written through multi-period policies.

Gross, ceded and net premiums written were as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Gross premiums written			$	14,102	$	27,861	$	(13,759)	(49.4	%)
Less: Ceded premiums written			2,217		1,201		1,016		84.6	%
Net premiums written			$	11,885	$	26,660	$	(14,775)	(55.4	%)

Gross Premiums Written

Gross premiums written during the three months ended March 31, 2021 consisted of property insurance coverages (35% of total gross premiums written), specialty property coverages (30%), casualty coverages (25%), contingency coverages (8%) and property reinsurance coverages (2%). The decrease in gross premiums written during the 2021 three-month period as compared to the same period of 2020 was primarily driven by our decreased participation in the results of Syndicate 1729, partially offset by new business written, primarily on specialty property coverages. In addition, the decrease in gross premiums written for the 2021 three-month period also reflected the effect of a certain type of coverage reaching capacity limits as set forth by Syndicate 1729's business plan and, to a lesser extent, the effect of estimated reinstatement premiums of $0.6 million as compared to $1.8 million in the prior year period. The reinstatement premiums represent amounts payable to Syndicate 1729 under certain excess of loss reinsurance treaties, primarily associated with property and catastrophe related losses, which are fully earned in the period the changes in estimates occur.

Ceded Premiums Written

Syndicate 1729 utilizes reinsurance to provide the capacity to write larger limits of liability on individual risks, to provide protection against catastrophic loss and to provide protection against losses in excess of policy limits. As previously discussed, for the second half of 2020 Syndicate 6131 utilized external quota share reinsurance to manage the net loss exposure on the specialty property and contingency coverages it assumed from Syndicate 1729 by ceding essentially half of the premium assumed to an unaffiliated insurer; this agreement was non-renewed on January 1, 2021. Due to the quarter lag, the effect of this reinsurance arrangement was not reflected in our results until the fourth quarter of 2020. Ceded premiums written increased for the three months ended March 31, 2021 as compared to the same period of 2020 primarily driven by the impact of premiums ceded under Syndicate 6131's six-month quota share agreement, partially offset by our decreased participation in the results of Syndicate 1729.

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Net Premiums Earned

Net premiums earned consist of gross premiums earned less the portion of earned premiums that the Syndicates cede to reinsurers for their assumption of a portion of losses. Premiums written through open-market channels are generally earned pro rata over the entire policy period, which is predominately twelve months, whereas premiums written through delegated underwriting authority arrangements are earned over twenty-four months. Therefore, net premiums earned is affected by shifts in the mix of policies written between the open-market and delegated underwriting authority arrangements. Additionally, net premiums earned consists of a mix of policies earned from different open underwriting years. As previously discussed, we participate to a varying degree in each open underwriting year which may cause fluctuations in premiums earned. Furthermore, fluctuations in premiums earned tend to lag those of premiums written. Premiums for certain policies and assumed reinsurance contracts are reported subsequent to the coverage period and/or may be subject to adjustment based on loss experience. These premium adjustments are earned when reported, which can result in further fluctuation in earned premium.

Gross, ceded and net premiums earned were as follows:


	Three Months Ended March 31
($ in thousands)		2021			2020			Change
Gross premiums earned			$	20,385		$	28,196		$	(7,811)	(27.7	%)
Less: Ceded premiums earned			4,535			6,195			(1,660)		(26.8	%)
Net premiums earned			$	15,850		$	22,001		$	(6,151)	(28.0	%)

The decrease in gross premiums earned during the three months ended March 31, 2021 as compared to the same period of 2020 reflected the effect of reinstatement premiums earned during each of the first quarters of 2021 and 2020 (see previous discussion under the heading "Gross Premiums Written"). After removing the effect of the reinstatement premiums from both periods, gross premiums earned decreased $6.6 million in the 2021 three-month period as compared to the same period of 2020. The decrease in gross premiums earned during the three months ended March 31, 2021 was driven by our decreased participation in Syndicate 1729, somewhat offset by the pro rata effect of higher premiums written at the Syndicates during the preceding twelve months, primarily property insurance and casualty coverages.

The decrease in ceded premiums earned during the 2021 three-month period as compared to the same period of 2020 was driven by our decreased participation in Syndicate 1729, partially offset by the pro rata effect of an increase in premiums ceded under reinsurance arrangements during the preceding twelve months.

Net Losses and Loss Adjustment Expenses

Losses for the period were primarily recorded using the loss assumptions by risk category incorporated into the business plans submitted to Lloyd's for Syndicate 1729 and Syndicate 6131 with consideration given to loss experience incurred to date. The assumptions used in each business plan were consistent with loss results reflected in Lloyd's historical data for similar risks. The loss ratios may fluctuate due to the mix of earned premium and the timing of earned premium adjustments (see discussion in this section under the heading "Net Premiums Earned"). Premium and exposure for some of Syndicate 1729's insurance policies and reinsurance contracts are initially estimated and subsequently adjusted over an extended period of time as underlying premium reports are received from cedants and insureds. When reports are received, the premium, exposure and corresponding loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the accident year in which the premium is earned.

The following table summarizes calendar year net loss ratios by separating losses between the current accident year and all prior accident years. Net loss ratios for the period were as follows:


		Net Loss Ratios
	Three Months Ended March 31
		2021	2020	Change
Calendar year net loss ratio		81.8%	67.2%	14.6 pts
Less: impact of prior accident years on the net loss ratio		9.7%	(1.5%)	11.2 pts
Current accident year net loss ratio		72.1%	68.7%	3.4 pts

For the three months ended March 31, 2021, the current accident year net loss ratio increased 3.4 percentage points as compared to the same period of 2020. The increase in the current accident year net loss ratio was driven by certain property and catastrophe related losses.

We recognized $1.5 million of unfavorable prior year development for the three months ended March 31, 2021 as compared to $0.3 million of favorable prior year development for the same period of 2020. The unfavorable development

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recognized during the three months ended March 31, 2021 was driven by higher than expected losses and development on certain large claims, primarily catastrophe related losses, which resulted in unfavorable development with respect to a previous year of account.

We have exposures to potential COVID-19 claims through our participation in Syndicates 1729 and 6131. During the three months ended March 31, 2021, we recognized losses related to COVID-19 of approximately $0.8 million, net of reinsurance, primarily in Syndicate 6131's contingency and Syndicate 1729's casualty books of business. Please see the "Insurance Regulatory Matters" section in Part 1, Item 1 in our December 31, 2020 report on Form 10-K for additional information.

Underwriting, Policy Acquisition and Operating Expenses

Underwriting, policy acquisition and operating expenses decreased by $2.6 million for the 2021 three-month period as compared to the same period of 2020 and reflected our decreased participation in Syndicate 1729.

For the three months ended March 31, 2021, the underwriting expense ratio was unchanged from the same period of 2020 driven by lower operating expenses due to our reduced participation in Syndicate 1729, offset by a decrease in net premiums earned, as previously discussed.

Investments

Syndicate 1729's fixed maturities portfolio includes certain debt securities classified as trading securities. Investment results associated with these fixed maturity trading securities are reported on the same quarter lag. The decrease in net investment income for the 2021 three-month period as compared to the same period of 2020 was primarily attributable to lower average investment balances and lower yields, primarily from investment-grade corporate debt securities. The lower average investment balances for the 2021 three-month period were driven by the return of approximately $32.3 million of cash and cash equivalents from our FAL balances given the reduction in our participation in the results of Syndicate 1729 for the 2020 underwriting year (see Note 6 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K). In addition, we expect to receive a return of approximately $24 million of FAL given our additional reduction in our participation in the results of Syndicate 1729 and Syndicate 6131 for the 2021 underwriting year, as previously discussed, which is anticipated to further impact our segment's net investment income in future periods.

Taxes

The results of this segment are subject to U.K. income tax law.

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Segment Results - Corporate

Our Corporate segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes as discussed in Note 14 of the Notes to Condensed Consolidated Financial Statements. Our Corporate segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses. Segment results for our Corporate segment were net earnings of $19.6 million for the three months ended March 31, 2021 as compared to a $4.0 million net loss for the same period of 2020 and included the following:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Net investment income			$	14,067	$	19,417	$	(5,350)	(27.6	%)
Equity in earnings (loss) of unconsolidated subsidiaries			$	6,788	$	(1,562)	$	8,350	(534.6	%)
Net realized gains (losses)			$	7,977	$	(25,547)	$	33,524	131.2	%
Other income			$	1,894	$	633	$	1,261	199.2	%
Operating expense			$	7,175	$	4,827	$	2,348	48.6	%
Interest expense			$	3,212	$	4,129	$	(917)	(22.2	%)
Income tax expense (benefit)			$	736	$	(12,047)	$	12,783	(106.1	%)

Net Investment Income, Equity in Earnings (Loss) of Unconsolidated Subsidiaries, Net Realized Investment Gains (Losses)

Net Investment Income

Net investment income is primarily derived from the income earned by our fixed maturity securities and also includes dividend income from equity securities, income from our short-term and cash equivalent investments, earnings from other investments and increases in the cash surrender value of BOLI contracts, net of investment fees and expenses.

Net investment income by investment category was as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Fixed maturities			$	14,725	$	16,931	$	(2,206)	(13.0	%)
Equities			694		1,909		(1,215)		(63.6	%)
Short-term investments, including Other			198		1,342		(1,144)		(85.2	%)
BOLI			444		456		(12)		(2.6	%)
Investment fees and expenses			(1,994)		(1,221)		(773)		63.3	%
Net investment income			$	14,067	$	19,417	$	(5,350)	(27.6	%)

Fixed Maturities

Income from our fixed maturities decreased during the 2021 three-month period as compared to the same period of 2020 primarily due to lower yields from our corporate debt securities, partially offset by higher average investment balances. Average investment balances were approximately 7% higher for the 2021 three-month period, as compared to the same period of 2020. The decline in income from our fixed maturities during the 2021 three-month period also reflected the impact of capital planning in anticipation of closing our acquisition of NORCAL.

Average yields for our fixed maturity portfolio were as follows:


	Three Months Ended March 31
		2021	2020
Average income yield		2.6%	3.4%
Average tax equivalent income yield		2.7%	3.4%

Equities

Income from our equity portfolio decreased during the 2021 three-month period as compared to the same period of 2020 which reflected a decrease in our allocation to this asset category.

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Short-term Investments and Other Investments

Short-term investments, which have a maturity at purchase of one year or less are carried at fair value, which approximates their cost basis, and are primarily composed of investments in U.S. treasury obligations, commercial paper and money market funds. Income from our short-term and other investments decreased during the 2021 three-month period as compared to the same period of 2020, primarily attributable to lower yields given the actions taken by the Federal Reserve to aggressively reduce interest rates in response to COVID-19.

Equity in Earnings (Loss) of Unconsolidated Subsidiaries

Equity in earnings (loss) of unconsolidated subsidiaries was comprised as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
All other investments, primarily investment fund LPs/LLCs			$	9,974	$	3,103	$	6,871	221.4	%
Tax credit partnerships			(3,186)		(4,665)		1,479		(31.7	%)
Equity in earnings (loss) of unconsolidated subsidiaries			$	6,788	$	(1,562)	$	8,350	534.6	%

We hold interests in certain LPs/LLCs that generate earnings from trading portfolios, secured debt, debt securities, multi-strategy funds and private equity investments. The performance of the LPs/LLCs is affected by the volatility of equity and credit markets. For our investments in LPs/LLCs, we record our allocable portion of the partnership operating income or loss as the results of the LPs/LLCs become available, typically following the end of a reporting period. The increase in our investment results from our portfolio of investments in LPs/LLCs for the 2021 three-month period as compared to the same period of 2020 was due to higher earnings from a few LPs/LLCs.

Our tax credit partnership investments are designed to generate returns in the form of tax credits and tax-deductible project operating losses and are comprised of qualified affordable housing project tax credit partnerships and a historic tax credit partnership. We account for our tax credit partnership investments under the equity method and record our allocable portion of the operating losses of the underlying properties based on estimates provided by the partnerships. For our qualified affordable housing project tax credit partnerships, we adjust our estimates of our allocable portion of operating losses periodically as actual operating results of the underlying properties become available. The primary benefit of credits and losses from our historic tax credit partnership are earned in a short period, with potential for additional cash flows extending over several years, and the remaining operating losses were recognized in 2020. The results from our tax credit partnership investments for the three months ended March 31, 2021 reflected lower partnership operating losses as compared to the same period of 2020.

The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above, reduced our tax expense in 2021 and 2020 as follows:


	Three Months Ended March 31
(In millions)		2021		2020
Tax credits recognized during the period		$	3.4	$	4.5
Tax benefit of tax credit partnership operating losses		$	0.7	$	1.0

The tax credits generated from our tax credit partnership investments of $3.4 million for the three months ended March 31, 2021 were deferred and are expected to be utilized in future periods.

Tax credits provided by the underlying projects of our historic tax credit partnership are typically available in the tax year in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax credit partnerships are provided over approximately a ten year period.

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Non-GAAP Financial Measure – Tax Equivalent Investment Result

We believe that to fully understand our investment returns it is important to consider the current tax benefits associated with certain investments as the tax benefit received represents a portion of the return provided by our tax-exempt bonds, BOLI, common and preferred stocks, and tax credit partnership investments (collectively, our tax-preferred investments). We impute a pro forma tax-equivalent result by estimating the amount of fully-taxable income needed to achieve the same after-tax result as is currently provided by our tax-preferred investments. We believe this better reflects the economics behind our decision to invest in certain asset classes that are either taxed at lower rates and/or result in reductions to our current federal income tax expense. Our pro forma tax-equivalent investment result is shown in the table that follows as well as a reconciliation of our GAAP net investment result to our tax equivalent result.


	Three Months Ended March 31
(In thousands)		2021		2020
GAAP net investment result:
Net investment income		$	14,067	$	19,417
Equity in earnings (loss) of unconsolidated subsidiaries		6,788		(1,562)
GAAP net investment result		$	20,855	$	17,855

Pro forma tax-equivalent investment result		$	22,883	$	23,871

Reconciliation of pro forma and GAAP tax-equivalent investment result:
GAAP net investment result		$	20,855	$	17,855
Taxable equivalent adjustments, calculated using the 21% federal statutory tax rate
State and municipal bonds		115		161
BOLI		118		121
Dividends received		3		73
Tax credit partnerships		1,792		5,661
Pro forma tax-equivalent investment result		$	22,883	$	23,871

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Net Realized Investment Gains (Losses)

The following table provides detailed information regarding our net realized investment gains (losses).


	Three Months Ended March 31
(In thousands)		2021		2020
Total impairment losses


Corporate debt		$	—	$	(1,817)


Portion of impairment losses recognized in other comprehensive income before taxes:
Corporate debt		—		654
Net impairment losses recognized in earnings		—		(1,163)
Gross realized gains, available-for-sale fixed maturities		4,163		2,279
Gross realized (losses), available-for-sale fixed maturities		(187)		(1,403)
Net realized gains (losses), equity investments		4,156		15,197
Net realized gains (losses), other investments		3,196		48
Change in unrealized holding gains (losses), equity investments		(3,788)		(35,225)
Change in unrealized holding gains (losses), convertible securities, carried at fair value as a part of other investments		(190)		(5,273)
Other		627		(7)
Net realized investment gains (losses)		$	7,977	$	(25,547)

We did not recognize any credit-related impairment losses in earnings or non-credit impairment losses in OCI for the three months ended March 31, 2021. For the three months ended March 31, 2020, we recognized credit-related impairment losses in earnings of $1.2 million and non-credit impairment losses in OCI of $0.7 million. The credit-related impairment losses related to four corporate bonds in the energy, consumer, and entertainment sectors. The non-credit related impairment losses related to three corporate bonds in the energy and consumer sectors.

We recognized $8.0 million of net realized investment gains during the 2021 three-month period, driven primarily by realized gains on the sale of certain available-for-sale fixed maturities and equity investments. We recognized $25.5 million of net realized investment losses during the 2020 three-month period driven by the impact of decreases in fair value on our equity portfolio of $35.2 million and convertible securities of $5.3 million due to the disruptions in global financial markets related to COVID-19 during the first quarter of 2020.

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Operating Expenses

Corporate segment operating expenses were comprised as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Operating expenses			$	9,719	$	9,093	$	626	6.9	%
Management fee offset			(2,544)		(4,266)		1,722		(40.4	%)
Total			$	7,175	$	4,827	$	2,348	48.6	%

Operating expenses increased during the 2021 three-month period as compared to the same period of 2020 primarily due to an increase in professional fees, partially offset by a decrease in compensation-related costs. The increase in professional fees during the 2021 three-month period was driven by an increase in transaction-related costs associated with our acquisition of NORCAL (see Note 15 of the Notes to Condensed Consolidated Financial Statements). The decrease in compensation-related costs during the 2021 three-month period was driven by a reduction in headcount as a result of the 2020 organizational restructuring and, to a lesser extent, a decrease in employer contributions to the ProAssurance Savings Plan (see Note 17 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K).

Operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments are charged a management fee by the Corporate segment for services provided to these subsidiaries. The management fee is based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary. Under the arrangement, the expenses associated with such services are reported as expenses of the Corporate segment, and the management fees charged are reported as an offset to Corporate operating expenses. Fluctuations in the amount of premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period. Due to organizational structure enhancements in our Specialty P&C segment during 2020, the extent to which services are provided by the Corporate segment to the operating subsidiaries within that segment decreased effective January 1, 2021. Accordingly, we reduced the fee charged to the operating subsidiaries within the Specialty P&C segment during the 2021 three-month period. There were no changes to the extent to which services are provided by the Corporate segment to the operating subsidiaries within our Workers' Compensation Insurance segment in 2021.

Interest Expense

Consolidated interest expense for the three months ended March 31, 2021 and 2020 was comprised as follows:


	Three Months Ended March 31
($ in thousands)		2021	2020		Change
Senior Notes due 2023			$	3,357	$	3,357	$	—	—	%
Revolving Credit Agreement (including fees and amortization)			214		184		30		16.3	%
Mortgage Loans (including amortization)			148		293		(145)		(49.5	%)
(Gain)/loss on interest rate cap			(507)		295		(802)		(271.9	%)

Interest expense			$	3,212	$	4,129	$	(917)	(22.2	%)

Consolidated interest expense decreased during the three months ended March 31, 2021 as compared to the same period of 2020 driven by the change in the fair value of our interest rate cap and, to a lesser extent, lower interest expense on our Mortgage Loans. The interest rate cap is designated as an economic hedge of interest rate risk associated with our variable rate Mortgage Loans. Our Mortgage Loans accrue interest at three-month LIBOR plus 1.325%, and the decrease in interest expense during the three months ended March 31, 2021 as compared to the same period of 2020 was primarily due to a decrease in the average three-month LIBOR. Interest expense on our Revolving Credit Agreement for the three months ended March 31, 2021 and 2020 primarily reflected unused commitment fees as there were no outstanding borrowings during either period. See further discussion of our outstanding debt in Note 10 of the Notes to Condensed Consolidated Financial Statements and further discussion of our interest rate cap agreement in Note 11 of the Notes to Consolidated Financial Statements in our December 31, 2020 report on Form 10-K.

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Taxes

Tax expense allocated to our Corporate segment includes U.S. tax only, which would include U.S. tax expense incurred from our corporate membership in Lloyd's of London. The U.K. tax expense incurred by the U.K. based subsidiaries of our Lloyd's Syndicates segment is allocated to that segment. The SPCs at Inova Re, one of our Cayman Islands reinsurance subsidiaries, have each made a 953(d) election under the U.S. Internal Revenue Code and are subject to U.S. federal income tax; therefore, tax expense allocated to our Corporate segment also includes tax expense incurred from any SPC at Inova Re in which we have a participation interest of 80% or greater as those SPCs are required to be included in our consolidated tax return. Consolidated tax expense (benefit) reflects the tax expense (benefit) of both segments, as shown in the table below:


	Three Months Ended March 31
(In thousands)		2021		2020
Corporate segment income tax expense (benefit)		$	736	$	(12,047)
Lloyd's Syndicates segment income tax expense (benefit)		—		(29)
Consolidated income tax expense (benefit)		$	736	$	(12,076)

Listed below are the primary factors affecting our consolidated effective tax rate for the three months ended March 31, 2021 and 2020. The comparability of each factor's impact on our effective tax rate is affected by the consolidated pre-tax income recognized during the three months ended March 31, 2021 as compared to the consolidated pre-tax loss recognized during the same period of 2020. Factors that have the same directional impact on income tax expense in each period have an opposite impact on our effective tax rate due to the effective tax rate being calculated based upon a pre-tax income during the three months ended March 31, 2021 versus the pre-tax loss during the same period of 2020. These factors include the following:




















	Three Months Ended March 31
	2021				2020
($ in thousands)	Income tax (benefit) expense		Rate Impact		Income tax (benefit) expense		Rate Impact
Computed "expected" tax expense (benefit) at statutory rate	$	1,779	21.0	%	$	(7,146)	21.0	%
Tax-exempt income (1)	(186)		(2.2	%)	(280)		0.9	%
Tax credits	(3,374)		(39.8	%)	(4,471)		13.1	%
Non-U.S. operating results	603		7.1	%	186		(0.5	%)
Tax deficiency on share-based compensation	297		3.5	%	405		(1.2	%)
Tax rate differential on loss carryback	—		—	%	(1,424)		4.2	%

Change in uncertain tax positions	57		0.7	%	712		(2.1	%)
Estimated annual tax rate differential (2)	2,087		24.6	%	—		—	%

Other	(527)		(6.2	%)	(58)		0.1	%
Total income tax expense (benefit)	$	736	8.7	%	$	(12,076)	35.5	%

(1) Includes tax-exempt interest, dividends received deduction and change in cash surrender value of BOLI.

(2) Represents the tax rate differential between our actual effective tax rate for the three months ended March 31, 2021 and our projected annual effective tax rate as of March 31, 2021 as calculated under the estimated annual effective tax rate method. There was no tax rate differential recorded for the three months ended March 31, 2020 as we used the discrete effective tax rate method in the first quarter of 2020 (see further discussion on this method in the Critical Accounting Estimates section under the heading "Estimation of Taxes/Tax Credits" in our March 31, 2020 report on Form 10-Q).

The provision (benefit) for income taxes and the effective tax rate for the three months ended March 31, 2021 is determined based upon our current estimate of our annual effective tax rate at the end of each quarterly reporting period (the projected annual effective tax rate) plus the impact of certain discrete items that are not included in the projected annual effective tax rate. See further discussion around the methods utilized to compute interim taxes under the heading "Estimation of Taxes/Tax Credits" in the Critical Accounting Estimates section. Our effective tax rates for both the 2021 and 2020 three-month periods were different from the statutory federal income tax rate of 21% primarily due to the benefit recognized from the tax credits transferred to us from our tax credit partnership investments. We recognized tax credits of $3.4 million and $4.5 million during the three months ended March 31, 2021 and 2020, respectively. While projected tax credits for 2021 are less than 2020, they continue to have a significant impact on the effective tax rate for the 2021 three-month period. For the 2020 three-month period, our effective tax rate was also affected by the additional tax rate differential of 14% on the carryback of our 2019 NOL to the 2014 tax year as a result of changes made by the CARES Act to the NOL provisions of the tax law.

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Our effective tax rate for the 2021 three-month period, as shown in the table above, differed from our projected annual effective tax rate of (38.4 %) as of the first quarter of 2021 due to certain discrete items. These discrete items increased our effective tax rate by 47.1% for the 2021 three-month period mainly due to the treatment of net realized investment gains. When we utilize the estimated annual effective tax rate method, net realized investment gains or losses are treated as discrete items and reflected in the effective tax rate in the period in which they are included in income. This treatment of net realized investment gains of $8.0 million in our Corporate segment for the three months ended March 31, 2021 accounted for an increase of 19.8% in the effective tax rate.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We believe that we are principally exposed to three types of market risk: interest rate risk, credit risk and equity price risk. We have limited exposure to foreign currency risk as we issue few insurance contracts denominated in currencies other than the U.S. dollar and we have few monetary assets or obligations denominated in foreign currencies.

Interest Rate Risk

Investments

Our fixed maturities portfolio is exposed to interest rate risk. Fluctuations in interest rates have a direct impact on the market valuation of these securities. As interest rates rise, market values of fixed income portfolios fall and vice versa. Future market interest rates are particularly uncertain at this time given the abrupt interest rate cuts made by the Federal Reserve in response to the COVID-19 pandemic. Certain of the securities are held in an unrealized loss position; we do not intend to sell and believe we will not be required to sell any debt security held in an unrealized loss position before its anticipated recovery.

The following tables summarize estimated changes in the fair value of our available-for-sale fixed maturity securities for specific hypothetical changes in interest rates by asset class at March 31, 2021 and December 31, 2020. There are principally two factors that determine interest rates on a given security: changes in the level of yield curves and credit spreads. As different asset classes can be affected in different ways by movements in those two factors, we have separated our portfolio by asset class in the following tables.


	Interest Rate Shift in Basis Points
	March 31, 2021
($ in millions)	(200)		(100)		Current		100		200
Fair Value:
Fixed maturities, available-for-sale:
U.S. Treasury obligations	$	110	$	105	$	103	$	101	$	96
U.S. Government-sponsored enterprise obligations	13		12		11		12		11
State and municipal bonds	368		337		322		309		282
Corporate debt	1,588		1,481		1,429		1,380		1,284
Asset-backed securities	748		715		698		676		632
Total fixed maturities, available-for-sale	$	2,827	$	2,650	$	2,563	$	2,478	$	2,305

Duration:
Fixed maturities, available-for-sale:
U.S. Treasury obligations	2.36		2.32		2.27		2.23		2.18
U.S. Government-sponsored enterprise obligations	1.55		1.92		2.82		2.97		2.93
State and municipal bonds	4.71		4.52		4.37		4.52		4.71
Corporate debt	3.67		3.59		3.51		3.46		3.39
Asset-backed securities	2.36		2.42		2.87		3.25		3.41
Total fixed maturities, available-for-sale	3.40		3.33		3.39		3.48		3.50

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	Interest Rate Shift in Basis Points
	December 31, 2020
($ in millions)	(200)		(100)		Current		100		200
Fair Value:
Fixed maturities, available-for-sale:
U.S. Treasury obligations	$	113	$	110	$	107	$	104	$	102
U.S. Government-sponsored enterprise obligations	13		13		12		12		12
State and municipal bonds	361		347		333		320		308
Corporate debt	1,427		1,377		1,329		1,284		1,241
Asset-backed securities	704		690		677		659		639
Total fixed maturities, available-for-sale	$	2,618	$	2,537	$	2,458	$	2,379	$	2,302

Duration:
Fixed maturities, available-for-sale:
U.S. Treasury obligations	2.65		2.60		2.56		2.51		2.46
U.S. Government-sponsored enterprise obligations	1.80		1.77		2.11		2.99		3.14
State and municipal bonds	4.07		4.01		3.96		3.91		3.88
Corporate debt	3.62		3.52		3.44		3.40		3.35
Asset-backed securities	2.29		2.23		2.34		2.86		3.21
Total fixed maturities, available-for-sale	3.27		3.19		3.16		3.28		3.34

Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including the maintenance of the existing level and composition of fixed income security assets, and should not be relied on as indicative of future results.

Certain shortcomings are inherent in the method of analysis presented in the computation of the fair value of fixed rate instruments. Actual values may differ from the projections presented should market conditions vary from assumptions used in the calculation of the fair value of individual securities, including non-parallel shifts in the term structure of interest rates and changing individual issuer credit spreads.

At March 31, 2021, our fixed maturities portfolio includes fixed maturities classified as trading securities which do not have a significant amount of exposure to market interest rates or credit spreads.

Our cash and short-term investments at March 31, 2021 were carried at fair value which approximates their cost basis due to their short-term nature. Our cash and short-term investments lack significant interest rate sensitivity due to their short duration.

Debt

Our Mortgage Loans are exposed to interest rate risk as they accrue interest at three-month LIBOR plus 1.325%. However, a 1% change in LIBOR will not materially impact our annualized interest expense. Additionally, we have economically hedged the risk of a change in interest rates in excess of 1% on the Mortgage Loans through the purchase of an interest rate cap derivative instrument, which effectively caps our annual interest rate on the Mortgage Loans at a maximum of 3.675% (see Note 11 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K for additional information). The fair value of the interest rate cap is not materially impacted by a 1% change in LIBOR; however, the carrying value of the interest rate cap is impacted by future expectations for LIBOR as well as estimations of volatility in the future yield curve.

Our Revolving Credit Agreement is exposed to interest rate risk as it is LIBOR based and a 1% change in LIBOR will impact annual interest expense only to the extent that there is an outstanding balance. For every $100 million drawn on our Revolving Credit Agreement, a 1% change in interest rates will change our annual interest expense by $1 million. Any outstanding balances on the Revolving Credit Agreement can be repaid on each maturity date, which has typically ranged from one to three months. As of March 31, 2021, no borrowings were outstanding under our Revolving Credit Agreement.

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Credit Risk

We have exposure to credit risk primarily as a holder of fixed income securities. We control this exposure by emphasizing investment grade credit quality in the fixed income securities we purchase.

As of March 31, 2021, 94% of our fixed maturity securities were rated investment grade as determined by NRSROs, such as Fitch, Moody’s and Standard & Poor’s. We believe that this concentration in investment grade securities reduces our exposure to credit risk on our fixed income investments to an acceptable level. However, investment grade securities, in spite of their rating, can rapidly deteriorate and result in significant losses. Ratings published by the NRSROs are one of the tools used to evaluate the creditworthiness of our securities. The ratings reflect the subjective opinion of the rating agencies as to the creditworthiness of the securities; therefore, we may be subject to additional credit exposure should the ratings prove to be unreliable.

We also have exposure to credit risk related to our premiums receivable and receivables from reinsurers; however, to-date we have not experienced any significant amount of credit losses. At March 31, 2021, our premiums receivable was approximately $211 million, net of an allowance for expected credit losses of approximately $6 million. See Note 1 of the Notes to Condensed Consolidated Financial Statements for further information on our allowance for expected credit losses related to our premiums receivable. Our receivables from reinsurers (with regard to both paid and unpaid losses) approximated $404 million at March 31, 2021 and $399 million at December 31, 2020. We monitor the credit risk associated with our reinsurers using publicly available financial and rating agency data. We have not historically experienced material credit losses due to the financial condition of a reinsurer, and as of March 31, 2021 our expected credit losses associated with our receivables from reinsurers were nominal in amount.

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ITEM 4. CONTROLS AND PROCEDURES.

The principal executive officer and principal financial officer of the Company participated in management’s evaluation of our disclosure controls and procedures (as defined in SEC Rule 13a-15(e)) as of March 31, 2021. ProAssurance’s disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, those controls during the quarter.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

See Note 8 of the Notes to Condensed Consolidated Financial Statements.

ITEM 1A. RISK FACTORS.

There are no material changes to the "Risk Factors" disclosed in Part 1, Item 1A of ProAssurance's December 31, 2020 report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

(a)Not applicable.

(b)Not applicable.

(c)Information required by Item 703 of Regulation S-K.


Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs* (In thousands)
January 1 - 31, 2021	—	N/A	—	$109,643
February 1 - 28, 2021	—	N/A	—	$109,643
March 1 - 31, 2021	—	N/A	—	$109,643
Total	—	$—	—

*Under its current plan begun in November 2010, the Board has authorized $600 million for the repurchase of common shares or the retirement of outstanding debt. This is ProAssurance’s only plan for the repurchase of common shares, and the plan has no expiration date.

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ITEM 6. EXHIBITS


Exhibit Number						Description

10.1						Amendment No. 1 to amended and restated Revolving Credit Agreement, dated as of April 19, 2021, between ProAssurance and U.S. Bank N.A., Wells Fargo Bank N.A., Keybank N.A., Regions Bank, Trust Bank, Cadence Bank N.A., and First Horizon Bank

31.1						Certification of Principal Executive Officer of ProAssurance as required under SEC rule 13a-14(a).

31.2						Certification of Principal Financial and Accounting Officer of ProAssurance as required under SEC rule 13a-14(a).

32.1						Certification of Principal Executive Officer of ProAssurance as required under SEC Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350).

32.2						Certification of Principal Financial and Accounting Officer of ProAssurance as required under SEC Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as amended (18 U.S.C. 1350).

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

101.LAB						XBRL Taxonomy Extension Labels Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


PROASSURANCE CORPORATION

May 7, 2021


/s/ Dana S. Hendricks
Dana S. Hendricks
Chief Financial Officer
(Duly authorized officer and principal financial officer)

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