Proassurance (PRA) 10-Q 2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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,	AL	35209
(Address of principal executive offices)				(Zip Code)
	(205)	877-4400
(Registrant’s telephone number, including area code)				(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐   No  ☒

As of November 3, 2021, there were 53,983,561 shares of the registrant’s common stock outstanding.

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
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
DDR	Death, disability and retirement
DPAC	Deferred policy acquisition costs
Eastern Re	Eastern Re, LTD, S.P.C.
EBUB	Earned but unbilled premium
ECO/XPL	Extra-contractual obligations/excess of policy limit claims
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 with original borrowing amounts of approximately $18 million and approximately $23 million, each entered into by a subsidiary of ProAssurance
NAV	Net asset value
NOL	Net operating loss
NORCAL	NORCAL Insurance Company, formally known as NORCAL Mutual Insurance Company
NRSRO	Nationally recognized statistical rating organization
NYSE	New York Stock Exchange
OCI	Other comprehensive income (loss)
PBO	Projected benefit obligations
PCAOB	Public Company Accounting Oversight Board
PDR	Premium deficiency reserve
PPM RRG	Preferred Physicians Medical Risk Retention Group, a Mutual Insurance Company
Revolving Credit Agreement	ProAssurance's $250 million revolving credit agreement
ROE	Return on equity
ROU	Right-of-use
SEC	Securities and Exchange Commission
SPA	Special Purpose Arrangement

2

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

3

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;

• loss or consolidation of independent agents, agencies, brokers or brokerage firms;

• changes in our organization, compensation and benefit plans;

4

•	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 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 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.

5

	TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - SEPTEMBER 30, 2021 AND DECEMBER 31, 2020	7
	CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL (UNAUDITED) - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020	8
	CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020	10
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020	11
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	13
	BASIS OF PRESENTATION	13
	BUSINESS COMBINATION	16
	FAIR VALUE MEASUREMENT	20
	INVESTMENTS	30
	RETROACTIVE INSURANCE CONTRACTS	37
	INCOME TAXES	37
	GOODWILL	39
	RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES	40
	COMMITMENTS AND CONTINGENCIES	42
	LEASES	43
	DEBT	44
	SHAREHOLDERS' EQUITY	45
	VARIABLE INTEREST ENTITIES	47
	EARNINGS (LOSS) PER SHARE	47
	SEGMENT INFORMATION	48
	BENEFIT PLANS	53
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	54
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	120
ITEM 4.	CONTROLS AND PROCEDURES	123
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	123
ITEM 1A.	RISK FACTORS	123
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	124
ITEM 6.	EXHIBITS	125
SIGNATURE		126

6

ProAssurance Corporation and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

	September 30, 2021		December 31, 2020
Assets
Investments
Fixed maturities, available-for-sale, at fair value (amortized cost, $3,850,889 and $2,361,575, respectively; allowance for expected credit losses, none as of September 30, 2021 and $552 as of December 31, 2020)	$	3,904,136	$	2,457,531
Fixed maturities, trading, at fair value (cost, $45,307 and $47,907, respectively)	45,049		48,456
Equity investments, at fair value (cost, $210,320 and $113,709, respectively)	214,530		120,101
Short-term investments	151,708		337,813
Business owned life insurance	80,821		67,847
Investment in unconsolidated subsidiaries	317,869		310,529
Other investments (at fair value, $106,842 and $44,116, respectively, otherwise at cost or amortized cost)	110,012		47,068
Total Investments	4,824,125		3,389,345
Cash and cash equivalents	202,953		215,782
Premiums receivable, net	288,819		201,395
Receivable from reinsurers on paid losses and loss adjustment expenses	17,872		14,370
Receivable from reinsurers on unpaid losses and loss adjustment expenses	476,315		385,087
Prepaid reinsurance premiums	32,275		35,885
Deferred policy acquisition costs	57,929		47,196
Deferred tax asset, net	117,940		57,105
Real estate, net	30,547		30,529
Operating lease ROU assets	20,253		19,013
Intangible assets, net	74,955		65,720
Goodwill	49,610		49,610
Other assets	133,675		143,766
Total Assets	$	6,327,268	$	4,654,803
Liabilities and Shareholders' Equity
Liabilities
Policy liabilities and accruals
Reserve for losses and loss adjustment expenses	$	3,632,686	$	2,417,179
Unearned premiums	509,317		361,547
Reinsurance premiums payable	36,459		39,998
Total Policy Liabilities	4,178,462		2,818,725
Operating lease liabilities	21,670		20,116
Other liabilities	279,276		182,039
Debt less unamortized debt issuance costs	424,758		284,713
Total Liabilities	4,904,166		3,305,593
Shareholders' Equity
Common shares (par value $0.01 per share, 100,000,000 shares authorized, 63,308,434 and 63,217,708 shares issued, respectively)	633		632
Additional paid-in capital	391,875		388,150
Accumulated other comprehensive income (loss) (net of deferred tax expense (benefit) of $11,100 and $19,386, respectively)	41,507		75,227
Retained earnings	1,405,049		1,301,163
Treasury shares, at cost (9,325,180 shares as of each respective period end)	(415,962)		(415,962)
Total Shareholders' Equity	1,423,102		1,349,210
Total Liabilities and Shareholders' Equity	$	6,327,268	$	4,654,803

See accompanying notes.

7

ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Capital (Unaudited)

(In thousands)

	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total
Balance at July 1, 2021	$	633	$	390,748	$	53,072	$	1,395,549	$	(415,962)	$	1,424,040
Common shares issued for compensation and effect of shares reissued to stock purchase plan	—		7		—		—		—		7
Share-based compensation	—		1,132		—		—		—		1,132
Net effect of restricted and performance shares issued	—		(12)		—		—		—		(12)
Dividends to shareholders	—		—		—		(2,700)		—		(2,700)
Other comprehensive income (loss)	—		—		(11,565)		—		—		(11,565)
Net income (loss)	—		—		—		12,200		—		12,200
Balance at September 30, 2021	$	633	$	391,875	$	41,507	$	1,405,049	$	(415,962)	$	1,423,102
	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	—		693		—		—		—		693
Share-based compensation	—		3,309		—		—		—		3,309
Net effect of restricted and performance shares issued	1		(277)		—		—		—		(276)
Dividends to shareholders	—		—		—		(8,098)		—		(8,098)
Other comprehensive income (loss)	—		—		(33,720)		—		—		(33,720)
Net income (loss)	—		—		—		111,984		—		111,984
Balance at September 30, 2021	$	633	$	391,875	$	41,507	$	1,405,049	$	(415,962)	$	1,423,102
Continued on the following page.

8

Continued from the previous page.
	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total
Balance at July 1, 2020	$	632	$	386,365	$	61,130	$	1,442,225	$	(415,962)	$	1,474,390
Common shares issued for compensation and effect of shares reissued to stock purchase plan	—		8		—		—		—		8
Share-based compensation	—		1,017		—		—		—		1,017
Net effect of restricted and performance shares issued	—		(4)		—		—		—		(4)
Dividends to shareholders	—		—		—		(2,694)		—		(2,694)
Other comprehensive income (loss)	—		—		7,155		—		—		7,155
Net income (loss)	—		—		—		(149,979)		—		(149,979)
Balance at September 30, 2020	$	632	$	387,386	$	68,285	$	1,289,552	$	(415,962)	$	1,329,893
	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	—		683		—		—		—		683
Share-based compensation	—		3,061		—		—		—		3,061
Net effect of restricted and performance shares issued	1		(909)		—		—		—		(908)
Dividends to shareholders	—		—		—		(22,078)		—		(22,078)
Other comprehensive income (loss)	—		—		31,330		—		—		31,330
Net income (loss)	—		—		—		(190,032)		—		(190,032)
Balance at September 30, 2020	$	632	$	387,386	$	68,285	$	1,289,552	$	(415,962)	$	1,329,893

See accompanying notes.

9

ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

(In thousands, except per share data)

	Three Months Ended September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Revenues
Net premiums earned	$	272,248	$	194,559	$	698,598	$	605,708
Net investment income	19,278		16,924		51,713		55,877
Equity in earnings (loss) of unconsolidated subsidiaries	15,244		4,853		33,959		(22,065)
Net realized investment gains (losses):
Impairment losses	—		—		—		(1,745)
Portion of impairment losses recognized in other comprehensive income (loss) before taxes	—		—		—		237
Net impairment losses recognized in earnings	—		—		—		(1,508)
Other net realized investment gains (losses)	530		8,838		20,212		1,658
Total net realized investment gains (losses)	530		8,838		20,212		150
Other income	2,400		1,723		6,862		5,668
Total revenues	309,700		226,897		811,344		645,338
Expenses
Net losses and loss adjustment expenses	223,393		145,581		555,030		521,412
Underwriting, policy acquisition and operating expenses:
Operating expense	38,659		32,419		120,721		96,650
DPAC amortization	28,153		27,014		79,729		83,528
SPC U.S. federal income tax expense	431		871		1,291		1,573
SPC dividend expense (income)	1,320		3,854		5,926		7,988
Interest expense	5,814		3,881		14,203		11,725
Goodwill impairment	—		161,115		—		161,115
Total expenses	297,770		374,735		776,900		883,991
Gain on bargain purchase	—		—		74,408		—
Income (loss) before income taxes	11,930		(147,838)		108,852		(238,653)
Provision for income taxes:
Current expense (benefit)	3,692		11,314		2,643		(26,621)
Deferred expense (benefit)	(3,962)		(9,173)		(5,775)		(22,000)
Total income tax expense (benefit)	(270)		2,141		(3,132)		(48,621)
Net income (loss)	12,200		(149,979)		111,984		(190,032)
Other comprehensive income (loss), after tax, net of reclassification adjustments	(11,565)		7,155		(33,720)		31,330
Comprehensive income (loss)	$	635	$	(142,824)	$	78,264	$	(158,702)
Earnings (loss) per share
Basic	$	0.23	$	(2.78)	$	2.08	$	(3.53)
Diluted	$	0.23	$	(2.78)	$	2.07	$	(3.53)
Weighted average number of common shares outstanding:
Basic	53,982		53,889		53,955		53,854
Diluted	54,078		53,918		54,042		53,896
Cash dividends declared per common share	$	0.05	$	0.05	$	0.15	$	0.41

See accompanying notes.

10

ProAssurance Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine Months Ended September 30
	2021		2020
Operating Activities
Net income (loss)	$	111,984	$	(190,032)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Goodwill impairment	—		161,115
Gain on bargain purchase	(74,408)		—
Depreciation and amortization, net of accretion	26,566		16,168
(Increase) decrease in cash surrender value of BOLI	(393)		(1,281)
Net realized investment (gains) losses	(20,212)		(150)
Share-based compensation	3,318		3,052
Deferred income tax expense (benefit)	(5,775)		(22,000)
Policy acquisition costs, net of amortization (net deferral)	(10,733)		2,529
Equity in (earnings) loss of unconsolidated subsidiaries	(33,959)		22,065
Distributed earnings from unconsolidated subsidiaries	20,921		29,844
Other	(194)		2,605
Other changes in assets and liabilities:
Premiums receivable	23,482		6,486
Reinsurance related assets and liabilities	(4,791)		(11,079)
Other assets	21,358		(13,297)
Reserve for losses and loss adjustment expenses	33,062		60,962
Unearned premiums	(30,630)		2,098
Other liabilities	9,767		4,088
Net cash provided (used) by operating activities	69,363		73,173
Investing Activities
Purchases of:
Fixed maturities, available-for-sale	(1,169,582)		(689,429)
Equity investments	(140,550)		(63,386)
Other investments	(61,104)		(26,432)
Investment in unconsolidated subsidiaries	(15,316)		(32,768)
Proceeds from sales or maturities of:
Fixed maturities, available-for-sale	777,783		635,392
Equity investments	425,039		174,130
Other investments	35,087		27,279
Net sales or (purchases) of fixed maturities, trading	2,935		(4,893)
Return of invested capital from unconsolidated subsidiaries	47,963		26,831
Net sales or maturities (purchases) of short-term investments	247,085		(37,549)
Unsettled security transactions, net change	49,905		21,498
Purchases of capital assets	(3,200)		(6,665)
Purchases of intangible assets	—		(1,198)
Cash paid for acquisitions, net of cash acquired	(221,576)		—
Other	—		(811)
Net cash provided (used) by investing activities	(25,531)		21,999
Continued on the following page.

11

	Nine Months Ended September 30
	2021		2020
Continued from the previous page.
Financing Activities
Repayments of Mortgage Loans	(36,113)		(1,127)
Dividends to shareholders	(8,067)		(35,978)
Capital contribution received from (return of capital to) external segregated portfolio cell participants	(9,114)		(581)
Purchase of non-controlling interest	(3,089)		—
Other	(278)		(907)
Net cash provided (used) by financing activities	(56,661)		(38,593)
Increase (decrease) in cash and cash equivalents	(12,829)		56,579
Cash and cash equivalents at beginning of period	215,782		175,369
Cash and cash equivalents at end of period	$	202,953	$	231,948
Significant Non-Cash Transactions
Dividends declared and not yet paid	$	2,700	$	2,694
Operating ROU assets obtained in exchange for operating lease liabilities	$	5,275	$	478
Fair value of Contribution Certificates issued in NORCAL acquisition	$	174,999	$	—
Fair value of contingent consideration in NORCAL acquisition	$	24,000	$	—

See accompanying notes.

12

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of ProAssurance Corporation, its wholly owned subsidiaries and VIEs in which ProAssurance is the primary beneficiary (ProAssurance, PRA or the Company). See Note 13 for more information on ProAssurance's VIE interests. The financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring adjustments, have been included. ProAssurance’s results for the nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes contained in ProAssurance’s December 31, 2020 report on Form 10-K.

ProAssurance operates in 5 reportable segments as follows: Specialty P&C, Workers' Compensation Insurance, Segregated Portfolio Cell Reinsurance, Lloyd's Syndicates and Corporate. For more information on the Company's segment reporting, including the nature of products and services provided and financial information by segment, refer to Note 15.

Certain insignificant prior period amounts have been reclassified to conform to the current period presentation.

Accounting Policies

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosures related to these amounts at the date of the financial statements. The Company evaluates these estimates and assumptions on an ongoing basis based on current and historical developments, market conditions, industry trends and other information that the Company believes to be reasonable under the circumstances, including the potential impacts of the COVID-19 pandemic (see "Item 1A, Risk Factors" in ProAssurance's December 31, 2020 report on Form 10-K for additional information). The Company can make no assurance that actual results will conform to its estimates and assumptions; reported results of operations may be materially affected by changes in these estimates and assumptions.

Except as described below, the significant accounting policies followed by ProAssurance in making estimates that materially affect financial reporting are summarized in Note 1 of the Notes to Consolidated Financial Statements in ProAssurance’s December 31, 2020 report on Form 10-K.

Business Combinations

The Company accounted for its acquisition of NORCAL in accordance with GAAP relating to business combinations which required management to make certain estimates and assumptions including determining the fair value of the non-cash components of the acquisition consideration and the acquisition date fair values of the acquired tangible and identifiable intangible assets and assumed liabilities of NORCAL. Subsequent to the preliminary valuation of the non-cash components of the purchase consideration and net assets acquired, any adjustment identified associated with the purchase price allocation will be evaluated to determine whether the adjustment represents a measurement period adjustment in accordance with GAAP. If the adjustment is deemed to be a measurement period adjustment and is identified within one year of the acquisition, then the measurement period adjustment will be recorded in the current reporting period with a corresponding adjustment to the gain on bargain purchase.

Contingent Consideration

Contingent consideration in a business combination that is classified as a liability is measured at fair value on the date of acquisition and remeasured to fair value each subsequent reporting period with changes in the fair value recognized in earnings.

VOBA

VOBA is based on actuarially determined projections and reflects the estimated fair value of in-force contracts acquired in a business combination. VOBA is recorded as an asset when the in-force contracts acquired are expected to generate underwriting income and is recorded as a liability when the in-force contracts acquired are expected to generate an underwriting loss. VOBA liabilities (negative VOBA) are recorded as a component of the reserve for losses and loss adjustment expenses on the Condensed Consolidated Balance Sheets. To the extent negative VOBA relates to unearned premium, it is amortized over a period in proportion to the earn-out of the premium as a reduction to current accident year net losses and loss adjustment expenses. To the extent negative VOBA relates to the DDR reserve, it is amortized over a period in proportion to the

13

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

approximate consumption of losses as a reduction to prior accident year net losses and loss adjustment expenses. See Note 2 for more information.

Accounting Policies Acquired

The significant accounting policies adopted as a result of the acquisition of NORCAL on May 5, 2021 and followed by ProAssurance in making estimates that materially affect financial reporting are summarized below.

Other Assets and Liabilities

Other assets include the acquired NORCAL investments in a deferred compensation rabbi trust which are carried at fair value. These rabbi trust assets are related to other liabilities associated with funded deferred compensation agreements with NORCAL employees and previous members of NORCAL's Board of Directors.

Other liabilities include the assumed NORCAL liability for deferred compensation balances associated with the rabbi trust assets and the reported balance is determined based on the amount of elective deferrals and employer contributions adjusted for periodic changes in fair value of the participant balances based on the performance of the funds selected by the participants.

ProAssurance recognizes the net change in the fair value of the rabbi trust assets and associated deferred compensation liabilities as a component of net investment income during the period of change.

Pension

As a result of the NORCAL acquisition, the Company sponsors a frozen defined benefit pension plan which covers substantially all NORCAL employees (except those that were previous employees of Medicus Insurance Company and FD Insurance Company, employees of PPM RRG as well as new hires after December 31, 2013). Accounting for pension benefits requires the use of assumptions for the valuation of the PBO and the expected performance of the plan assets.

The Company uses December 31 as the measurement date for calculating its obligation related to this defined benefit pension plan. The PBO for pension benefits represents the present value of all future benefits earned as of the measurement date for vested and non-vested employees. At each measurement date, the Company reviews the various assumptions impacting the amounts recorded for the pension plan including the discount rates, which impacts the recorded value of the PBO and interest costs, and the expected return on plan assets.

To estimate the discount rate at the measurement date, the Company uses a bond yield curve model, developed based on pricing and yield information for high quality corporate bonds. The assumption for the expected return on plan assets is based on the anticipated returns that will be earned by the portfolio over the long term. The expected return is influenced, but not determined, by historical portfolio performance.

Accounting standards provide for the delayed recognition of differences between actual results and expected or estimated results. This delayed recognition of the differences is amortized into earnings over time. The differences between actual results and expected or estimated results are recognized in full in AOCI. Amounts recognized in AOCI are reclassified to earnings in a systematic manner over the average future service period of participants. Due to the acquisition of NORCAL and the application of GAAP purchase accounting, there were no amounts recorded in AOCI as of September 30, 2021 as the plan assets and benefit obligation are not remeasured on a quarterly basis.

Accounting Changes Adopted

Clarifying the Interactions between Investments - Equity Securities, Investments - Equity Method and Joint Ventures, and Derivatives and Hedging (ASU 2020-01)

Effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, the FASB amended guidance that clarifies the accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. ProAssurance adopted the guidance beginning January 1, 2021, and adoption had no material effect on ProAssurance's results of operations, financial position or cash flows.

Accounting Changes Not Yet Adopted

ProAssurance is not aware of any accounting changes not yet adopted as of September 30, 2021 that could have a material impact on its results of operations, financial position or cash flows.

14

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 4 for information on ProAssurance's allowance for expected credit losses on its available-for-sale fixed maturities.

ProAssurance’s premiums receivable on its Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 is reported net of the related allowance for expected credit losses of $7.7 million and $6.1 million, respectively. The following tables present a roll forward of the allowance for expected credit losses related to the Company's premiums receivable for the three and nine months ended September 30, 2021 and 2020.

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, July 1, 2021	$	288,589	$	7,729
Provision for expected credit losses			48
Write offs charged against the allowance			(125)
Recoveries of amounts previously written off			24
Balance, September 30, 2021	$	288,819	$	7,676

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, December 31, 2020	$	201,395	$	6,131
Initial allowance recognized in the period for NORCAL premiums receivable(1)			2,137
Provision for expected credit losses			505
Write offs charged against the allowance			(1,243)
Recoveries of amounts previously written off			146
Balance, September 30, 2021	$	288,819	$	7,676

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, July 1, 2020	$	234,840	$	6,627
Provision for expected credit losses			123
Write offs charged against the allowance			(404)
Recoveries of amounts previously written off			270
Balance, September 30, 2020	$	237,894	$	6,616

(In thousands)	Premiums Receivable, Net		Allowance for Expected Credit Losses
Balance, December 31, 2019	$	249,540	$	1,590
Cumulative-effect adjustment, before tax (2)			5,160
Provision for expected credit losses			616
Write offs charged against the allowance			(1,078)
Recoveries of amounts previously written off			328
Balance, September 30, 2020	$	237,894	$	6,616
(1) Represents an initial allowance for expected credit losses recognized during the second quarter of 2021 for NORCAL's premiums receivable to conform NORCAL to ProAssurance's accounting policies. See Note 2 for more information.
(2) Due to the adoption of ASU 2016-13, ProAssurance recorded a cumulative-effect adjustment to beginning retained earnings as of January 1, 2020 to increase its consolidated allowance for expected credit losses related to its premiums receivable. See Note 1 of the Notes to Consolidated Financial Statements in ProAssurance's December 31, 2020 report on Form 10-K.

15

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

ProAssurance’s expected credit losses associated with its reinsurance receivables (related to both paid and unpaid losses) were nominal in amount as of September 30, 2021 and December 31, 2020. ProAssurance has other financial assets and off-balance sheet commitments that are exposed to credit losses; however, expected credit losses associated with these assets and commitments were nominal in amount as of September 30, 2021 and December 31, 2020.

Other Liabilities

Other liabilities consisted of the following:

(In thousands)	September 30, 2021		December 31, 2020
SPC dividends payable	$	64,472	$	68,865
Unpaid shareholder dividends	2,700		2,694
Deferred compensation liabilities	51,456		30,334
Contingent consideration	24,000		—
All other	136,648		80,146
Total other liabilities	$	279,276	$	182,039

SPC dividends payable represents the undistributed equity contractually payable to the external cell participants of SPCs operated by ProAssurance's Cayman Islands subsidiaries, Inova Re and Eastern Re.

Unpaid shareholder dividends represent common stock dividends declared by ProAssurance's Board that had not yet been paid as of September 30, 2021.

Deferred compensation liabilities represent the amount of elective deferrals and employer contributions adjusted for periodic changes in the fair value of the participant balances based on the performance of the funds selected by the participants. See additional information on the deferred compensation liabilities in Note 3.

Contingent consideration represents a portion of the purchase consideration for the NORCAL acquisition and depends on the after-tax development of NORCAL's ultimate net losses over a three year period beginning on December 31, 2020. See additional information on the contingent consideration in Note 2.

2. Business Combination

On May 5, 2021, ProAssurance completed its acquisition of NORCAL by purchasing 98.8% of its stock in exchange for total consideration transferred of $448.8 million. On September 16, 2021, ProAssurance acquired the remaining 1.2% interest in NORCAL for $3.1 million of cash. The NORCAL transaction provides strategic and financial benefits including additional scale and geographic diversification in the physician professional liability market. On May 5, 2021, ProAssurance funded the acquisition with $248.0 million of cash on hand, and NORCAL paid $1.8 million to policyholders who elected to receive a discounted cash option for their allocated share of the converted company's equity. Additional consideration transferred, with a principal amount of $191.0 million and a fair value of $175.0 million, is in the form of Contribution Certificates issued to certain NORCAL policyholders in the conversion, and those instruments are an obligation of NORCAL Insurance Company, the successor of NORCAL Mutual Insurance Company (see Note 11 for further discussion of the terms of the Contribution Certificates). Policyholders who tendered NORCAL stock to ProAssurance are also eligible for a share of contingent consideration in an amount of up to approximately $84.0 million depending upon the after-tax development of NORCAL's ultimate net losses between December 31, 2020 and December 31, 2023. The estimated fair value of this contingent consideration was $24.0 million as of May 5, 2021 and September 30, 2021.

ProAssurance's results for the three and nine months ended September 30, 2021 included NORCAL's results since the date of acquisition (revenue of $87.8 million and $141.1 million, respectively, and net income of $1.7 million and a net loss of $3.3 million, respectively). ProAssurance incurred expenses related to the acquisition of approximately $2.3 million and $23.5 million during the three and nine months ended September 30, 2021, respectively, and approximately $0.5 million and $1.6 million during the three and nine months ended September 30, 2020, respectively. These expenses were included as a component of operating expenses in the periods incurred in ProAssurance's Condensed Consolidated Statements of Income and Comprehensive Income.

ProAssurance accounted for its acquisition of NORCAL in accordance with GAAP relating to business combinations. The total acquisition consideration was allocated to the acquired tangible and identifiable intangible assets and assumed liabilities of NORCAL based on their preliminary estimated fair values on the acquisition date, as shown in the following table. The

16

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

amounts reflect preliminary allocation of assets acquired and liabilities assumed. The acquisition date fair value of certain assets acquired and liabilities assumed, including intangible assets, deferred income tax assets and liabilities, and reserves for losses and loss adjustment expenses are preliminary estimates and are subject to revisions within one year of acquisition date. Subsequent to the preliminary valuation of net assets acquired, any adjustment identified associated with the purchase price allocation will be evaluated to determine whether the adjustment represents a measurement period adjustment in accordance with GAAP. If the adjustment is deemed to be a measurement period adjustment and is identified within one year of the acquisition, then the measurement period adjustment will be recorded in the current reporting period with a corresponding adjustment to the gain on bargain purchase.

A $74.4 million gain on bargain purchase was recognized on the date of the acquisition as the fair value of the consideration transferred was less than the fair value of the net assets acquired. This gain is presented as a separate line item in ProAssurance's Condensed Consolidated Statements of Income and Comprehensive Income for the nine months ended September 30, 2021. ProAssurance believes it was able to acquire NORCAL for less than the fair value of its net assets due to several contributing factors including the soft medical professional liability market at the time the transaction was initially announced and the value attributed to certain assets. Before the acquisition, NORCAL had recorded a valuation allowance against the full value of its net deferred tax assets. In conjunction with acquisition accounting, ProAssurance recorded $46.8 million of net deferred tax assets reflecting the remeasurement of NORCAL's historical net deferred tax assets, as such deferred taxes were subject to recalculation following application of all purchase accounting adjustments, and its assessment of the realizability of NORCAL's historical deferred tax assets. Based upon the assessment of the realizability of NORCAL's historical deferred tax assets, ProAssurance management concluded that these deferred tax assets are now realizable, which increased the net assets acquired. In addition, based upon the historical performance of NORCAL, ProAssurance did not attribute any value to intangible assets in determining the initial base consideration of $450.0 million per the acquisition agreement, whereas ProAssurance identified $14.0 million of intangible assets as a part of its estimated allocation of final acquisition consideration. Other changes in the fair values of NORCAL's assets and liabilities from the time ProAssurance entered into the definitive acquisition agreement in February 2020 to the close of the transaction in May 2021 also contributed to the increase in net assets acquired and gain on bargain purchase.

The preliminary allocation of acquisition consideration is shown in the table below.

(In thousands)
Fixed maturities, available for sale	$	1,100,058
Equity investments, available for sale	374,484
Short-term investments	61,289
Business owned life insurance	12,581
Investment in unconsolidated subsidiaries	26,948
Other investments	32,461
Cash and cash equivalents	28,233
Premiums receivable	110,905
Receivable from reinsurers on paid losses and loss adjustment expenses	266
Receivable from reinsurers on unpaid losses and loss adjustment expenses	93,342
Prepaid reinsurance premiums	9,238
Deferred tax asset, net	46,759
Operating lease ROU assets	4,385
Intangible assets	14,000
Other assets	38,648
Reserve for losses and loss adjustment expenses	(1,182,445)
Unearned premiums	(178,400)
Reinsurance premiums payable	(12,981)
Operating lease liabilities	(5,275)
Other liabilities	(51,279)
Total identifiable net assets acquired	$	523,217
Gain on bargain purchase	(74,408)
Total acquisition consideration	$	448,809

17

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

The estimated fair values of intangible assets were determined based on 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. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion under the acquisition method of accounting. Intangible assets acquired included the following:

(In thousands)	Estimated Fair Value on Acquisition Date		Estimated Useful Life
Trade name	$	1,000	3
Licenses	13,000		Indefinite
Total	$	14,000

The estimated fair value of the reserve for losses and loss adjustment expenses and related reinsurance recoverables was based on three components: an actuarial estimate of the expected future net cash flows, a reduction to those cash flows for the time value of money determined utilizing the U.S. Treasury Yield Curve and a risk margin adjustment to reflect the net present value of profit that an investor would demand in return for the assumption of the development risk associated with the reserve. The fair value of the net reserve, including the risk margin adjustment and related reinsurance receivables, exceeded the actuarial estimate of NORCAL’s undiscounted loss reserve as of May 5, 2021. On May 5, 2021, the fair value adjustment on the gross reserve of approximately $42.2 million was recorded to the reserve for losses and loss adjustment expenses and the fair value adjustment on the related reinsurance recoverables of approximately $3.5 million was recorded to the receivable from reinsurers on unpaid losses and loss adjustment expenses on the Condensed Consolidated Balance Sheets. These net fair value adjustments of $38.7 million will be amortized over a period utilizing loss payment patterns as a net reduction to prior accident year net losses and loss adjustment expenses.

The estimated fair value of VOBA was determined based on 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 estimated using the income approach. The estimated negative VOBA recorded on the assumed unearned premium of $12.4 million was recorded to the reserve for losses and loss adjustment expenses and the fair value adjustment on the related reinsurance recoverables of $0.7 million was recorded to receivable from reinsurers on unpaid losses and loss adjustment expenses on the Condensed Consolidated Balance Sheets. The net VOBA on unearned premium of $11.7 million will be amortized over a period in proportion to the earn-out of the premium as a reduction to current accident year net losses and loss adjustment expenses. The estimated negative VOBA recorded on the assumed DDR reserve totaling $3.5 million was also recorded to the reserve for losses and loss adjustment expenses on the Condensed Consolidated Balance Sheets and will be amortized over a period in proportion to the approximate consumption of losses as a reduction to prior accident year net losses and loss adjustment expenses.

The following table reflects the fair value adjustment on the net reserve for losses and loss adjustment expenses, the negative net VOBA recorded on the assumed unearned premium and negative VOBA recorded on the DDR reserve, as well as the expected amortization of each for the five years following the acquisition.

(In thousands)	Amount at May 5, 2021		Estimated amortization period (years)	Expected pre-tax amortization for year following the acquisition
				2021		2022		2023		2024		2025		Thereafter
Fair value adjustment on reserves, net (1)	$	38,701	7	$	7,768	$	10,595	$	8,090	$	5,083	$	3,107	$	4,058
Unearned premium VOBA, net (2)	11,676		1	6,737		4,939		—		—		—		—
DDR reserve VOBA (1)	3,467		15	139		224		243		243		243		2,375
Total	$	53,844		$	14,644	$	15,758	$	8,333	$	5,326	$	3,350	$	6,433
(1) Amortization will be recorded as a reduction to prior accident year net losses and loss adjustment expenses.
(2) Amortization will be recorded as a reduction to current accident year net losses and loss adjustment expenses

18

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Unaudited Supplemental Pro Forma Information

The following table provides Pro Forma Consolidated Results and Actual Consolidated Results for the three and nine months ended September 30, 2021 and 2020 as if the NORCAL transaction had occurred on January 1, 2020.

The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the operating results that may have actually occurred had the acquisition of NORCAL been completed on January 1, 2020. In addition, the unaudited pro forma financial information does not give effect to any anticipated cost savings, operating efficiencies or other synergies that may be associated with the acquisition, or any estimated costs that have been or will be incurred to integrate the assets and operations of NORCAL.

	Three Months Ended September 30				Nine Months Ended September 30
(In thousands)	2021		2020		2021		2020
Revenue:
ProAssurance Pro Forma Consolidated Results	$	305,927	$	340,428	$	930,350	$	943,268
ProAssurance Actual Consolidated Results	$	309,700	$	226,897	$	811,344	$	645,338
Net income (loss):
ProAssurance Pro Forma Consolidated Results	$	13,366	$	(158,620)	$	58,692	$	(117,906)
ProAssurance Actual Consolidated Results	$	12,200	$	(149,979)	$	111,984	$	(190,032)

The ProAssurance Pro Forma Consolidated Results reflect pro forma adjustments, net of related tax effects, to give effect to certain events that are directly attributable to the acquisition. These pro forma adjustments primarily include:

•The addition of NORCAL's operating results prior to the acquisition to ProAssurance's Actual Consolidated Results in all periods shown.

•A reduction in expenses for the three and nine months ended September 30, 2021 and the three months ended September 30, 2020 and a corresponding increase for the nine months ended September 30, 2020 for transaction-related costs, including other costs associated with the acquisition such as compensation costs related to change in control payments.

•The effect of the amortization of intangible assets, VOBA and the fair value adjustment on the reserve. See previous amortization schedules for reference.

•The non-taxable gain on bargain purchase of $74.4 million that was included in ProAssurance's Actual Consolidated Results for the nine months ended September 30, 2021 has been reported in the Pro Forma Consolidated Results as being recognized during the nine months ended September 30, 2020.

•An adjustment to net investment income for the amortization of the fair value adjustment to NORCAL's investments.

•An increase to interest expense for the interest on the Contribution Certificates (see Note 11 for further discussion of the terms of the Contribution Certificates).

19

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

3. Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three level hierarchy has been established for valuing assets and liabilities based on how transparent (observable) the inputs are that are used to determine fair value, with the inputs considered most observable categorized as Level 1 and those that are the least observable categorized as Level 3. Hierarchy levels are defined as follows:

Level 1: quoted (unadjusted) market prices in active markets for identical assets and liabilities. For ProAssurance, Level 1 inputs are generally quotes for securities actively traded in exchange or over-the-counter markets.

Level 2: market data obtained from sources independent of the reporting entity (observable inputs). For ProAssurance, Level 2 inputs generally include quoted prices in markets that are not active, quoted prices for similar assets or liabilities, and results from pricing models that use observable inputs such as interest rates and yield curves that are generally available at commonly quoted intervals.

Level 3: the reporting entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (non-observable inputs). For ProAssurance, Level 3 inputs are used in situations where little or no Level 1 or 2 inputs are available or are inappropriate given the particular circumstances. Level 3 inputs include results from pricing models for which some or all of the inputs are not observable, discounted cash flow methodologies, single non-binding broker quotes and adjustments to externally quoted prices that are based on management judgment or estimation.

Fair values of assets measured at fair value on a recurring basis as of September 30, 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.

20

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

	September 30, 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	$	—	$	242,705	$	—	$	242,705
U.S. Government-sponsored enterprise obligations	—		20,468		—		20,468
State and municipal bonds	—		522,707		—		522,707
Corporate debt, multiple observable inputs	—		1,943,401		—		1,943,401
Corporate debt, limited observable inputs	—		—		19,712		19,712
Residential mortgage-backed securities	—		473,674		4,235		477,909
Agency commercial mortgage-backed securities	—		14,942		—		14,942
Other commercial mortgage-backed securities	—		219,024		—		219,024
Other asset-backed securities	—		432,261		11,007		443,268
Fixed maturities, trading	—		45,049		—		45,049
Equity investments
Financial	—		868		—		868
Utilities/Energy	—		—		69		69
Industrial	—		—		2,500		2,500
Bond funds	191,834		—		—		191,834
All other	19,259		—		—		19,259
Short-term investments	112,706		39,002		—		151,708
Other investments	1,864		104,978		—		106,842
Other assets	—		601		—		601
Total assets categorized within the fair value hierarchy	$	325,663	$	4,059,680	$	37,523	4,422,866
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							251,675
Total assets at fair value							$	4,674,541
Liabilities:
Other liabilities	$	—	$	—	$	24,000	$	24,000
Total liabilities categorized within the fair value hierarchy	$	—	$	—	$	24,000	$	24,000

21

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 September 30, 2021 and December 31, 2020.

22

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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.

Equity investments were securities not traded on an exchange on the valuation date. The securities were valued using the most recently available quotes for the securities.

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%.

23

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 September 30, 2021, 100% of the securities were rated and the average rating was BBB. 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 September 30, 2021, 95% of the securities were rated and the average rating was A. At December 31, 2020, 51% of the securities were rated and the average rating was AA-.

Equity Securities consisted of a preferred stock and a mutual fund for which limited observable inputs were available at September 30, 2021. The equity securities were primarily priced using broker/dealer quotes and internal models with some inputs that are unobservable.

Other liabilities consisted of the contingent consideration which is a portion of the purchase price for the NORCAL acquisition and is recorded at fair value each reporting period. The ultimate payout under the contingent consideration is dependent on the after-tax development of NORCAL's ultimate net losses over a three-year period beginning December 31, 2020 and may total up to $84 million. See further discussion around the contingent consideration in Note 2 and Note 9.

Quantitative Information Regarding Level 3 Valuations

	Fair Value at
($ in thousands)	September 30, 2021	December 31, 2020	Valuation Technique	Unobservable Input	Range (Weighted Average)
Assets:
Corporate debt, limited observable inputs	$19,712	$3,265	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Residential mortgage-backed securities	$4,235	$2,032	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Other asset-backed securities	$11,007	$6,661	Market Comparable Securities	Comparability Adjustment	0% - 5% (2.5%)
			Discounted Cash Flows	Comparability Adjustment	0% - 5% (2.5%)
Equity securities	$2,569	$—	Discounted Cash Flows	Comparability Adjustment	0% - 10% (5%)
Liabilities:
Other liabilities	$24,000	$—	Stochastic Model/Discounted Cash Flows	N/A	0% - 10% (8%)

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.

24

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Fair Value Measurements - Level 3 Assets

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

	September 30, 2021
	Level 3 Fair Value Measurements - Assets
(In thousands)	Corporate Debt		Asset-backed Securities		Equity Securities		Other Investments		Total
Balance, June 30, 2021	$	15,065	$	9,857	$	852	$	2,222	$	27,996
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net realized investment gains (losses)	—		—		(2)		(639)		(641)
Included in other comprehensive income	49		(74)		18		—		(7)
Purchases	10,881		12,666		2,500		—		26,047
Sales	(284)		(17)		—		—		(301)
Transfers in	—		—		69		—		69
Transfers out	(5,999)		(7,190)		(868)		(1,583)		(15,640)
Balance, September 30, 2021	$	19,712	$	15,242	$	2,569	$	—	$	37,523
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—	$	(1)	$	(639)	$	(640)
	September 30, 2021
	Level 3 Fair Value Measurements - Assets
(In thousands)	Corporate Debt		Asset-backed Securities		Equity 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)		(1)		(774)		(786)
Included in other comprehensive income	82		(171)		16		—		(73)
Purchases	24,971		28,026		9,083		205		62,285
Sales	(461)		(506)		(5,730)		—		(6,697)
Transfers in	858		—		69		2,152		3,079
Transfers out	(9,004)		(20,787)		(868)		(1,583)		(32,242)
Balance, September 30, 2021	$	19,712	$	15,242	$	2,569	$	—	$	37,523
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—	$	(1)	$	(774)	$	(775)

25

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

	September 30, 2020
	Level 3 Fair Value Measurements – Assets
(In thousands)	Corporate Debt		Asset-backed Securities		Other Investments		Total
Balance, June 30, 2020	$	3,117	$	5,978	$	1,568	$	10,663
Total gains (losses) realized and unrealized:
Included in earnings, as a part of:
Net realized investment gains (losses)	—		(2)		143		141
Included in other comprehensive income	(6)		(58)		—		(64)
Purchases	900		8,513		—		9,413
Sales	(16)		(99)		—		(115)
Transfers out	—		(1,378)		(1,711)		(3,089)
Balance, September 30, 2020	$	3,995	$	12,954	$	—	$	16,949
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—	$	143	$	143
	September 30, 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 investment income	—		(10)		—		(10)
Net realized investment gains (losses)	—		(2)		151		149
Included in other comprehensive income	38		23		—		61
Purchases	900		13,341		—		14,241
Sales	(2,173)		(888)		—		(3,061)
Transfers in	945		605		—		1,550
Transfers out	(794)		(3,107)		(3,237)		(7,138)
Balance, September 30, 2020	$	3,995	$	12,954	$	—	$	16,949
Change in unrealized gains (losses) included in earnings for the above period for Level 3 assets held at period-end	$	—	$	—	$	151	$	151

Fair Value Measurements - Level 3 Liabilities

There was no change in the fair value of the contingent consideration from the date of the NORCAL acquisition on May 5, 2021 to September 30, 2021.

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 and nine months ended September 30, 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.

26

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Fair Values Not Categorized

At September 30, 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 September 30, 2021 and fair values of these investments as of September 30, 2021 and December 31, 2020 were as follows:

	Unfunded Commitments	Fair Value
(In thousands)	September 30, 2021	September 30, 2021		December 31, 2020
Equity investments:
Mortgage fund (1)	None	$	—	$	12,548
Investment in unconsolidated subsidiaries:
Private debt funds (2)	$8,929	18,523		16,387
Long/short equity funds (3)	None	533		596
Non-public equity funds (4)	$38,713	144,539		138,357
Credit funds (5)	$41,123	43,125		34,848
Strategy focused funds (6)	$34,988	44,955		43,523
		251,675		233,711
Total investments carried at NAV		$	251,675	$	246,259

Below is additional information regarding each of the investments listed in the table above as of September 30, 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 2 unrelated LP funds that are structured to provide interest distributions primarily through diversified portfolios of private debt instruments. NaN 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 multiple 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. The remaining funds focus on private middle market company mezzanine and senior secured loans, opportunities across the credit spectrum, mortgage backed-loans, as well as various types of loan-backed investments. Three of the funds allow redemptions at any quarter-end with prior notice requirements that vary from 90 to 180 days, while another fund allows for redemptions with consent of the General Partner. The remaining funds do not allow redemptions. For the funds that do not allow redemptions, income and capital are to be periodically distributed at the discretion of the LP over time frames throughout the remaining life of the funds.

27

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

(6) This investment is comprised of multiple unrelated LPs/LLCs funds. One fund is an 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 an 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

During the third quarter of 2020, ProAssurance recognized a nonrecurring fair value measurement related to the goodwill in its Specialty P&C reporting unit with a carrying value of $161.1 million prior to the fair value measurement. This nonrecurring fair value measurement resulted in the goodwill being written down to its implied fair value of zero resulting in an impairment of goodwill of $161.1 million. The inputs used in the fair value measurement were non-observable and, as such, were categorized as a Level 3 valuation. ProAssurance did not have any other assets or liabilities that were measured at fair value on a nonrecurring basis at September 30, 2021 or 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.

	September 30, 2021				December 31, 2020
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
BOLI	$	80,821	$	80,821	$	67,847	$	67,847
Other investments	$	3,170	$	3,170	$	2,952	$	2,952
Other assets	$	39,584	$	39,593	$	31,128	$	31,141
Financial liabilities:
Senior notes due 2023*	$	250,000	$	267,988	$	250,000	$	269,160
Mortgage Loans*	$	—	$	—	$	36,113	$	36,113
Contribution Certificates	$	175,766	$	178,728	$	—	$	—
Other liabilities	$	51,456	$	51,456	$	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. Three 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 $38.5 million and $30.6 million at September 30, 2021 and December 31, 2020, respectively. The fair value of the funded deferred compensation assets as of September 30, 2021 included rabbi trust assets acquired as a result of the NORCAL acquisition, which consists entirely of cash equivalents and mutual funds with a total fair value of $5.1 million (see Note 2 for additional information on NORCAL acquisition). 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. Other liabilities primarily consisted of liabilities associated with funded deferred compensation agreements. The reported balance is determined based on the amount of elective deferrals and employer contributions adjusted for periodic changes in the fair value of the participant balances based on the

28

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

performance of the funds selected by the participants and had a fair value of $51.5 million and $30.3 million at September 30, 2021 and December 31, 2020, respectively. The fair value of the funded deferred compensation liabilities as of September 30, 2021 included liabilities assumed as a result of the NORCAL acquisition, with a total fair value of $18.0 million (see Note 2 for additional information).

The fair value of the debt, excluding the Contribution Certificates, 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.

The fair value of the Contribution Certificates was estimated based on a binomial option pricing model. The Contribution Certificates is a portion of the purchase consideration for the NORCAL acquisition and are issued to certain NORCAL policyholders in the conversion, and those instruments are an obligation of NORCAL Insurance Company, the successor of NORCAL Mutual Insurance Company (see Note 2 and 11 for further discussion of the terms of the Contribution Certificates).

29

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

4. Investments

Available-for-sale fixed maturities at September 30, 2021 and December 31, 2020 included the following:

	September 30, 2021
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities, available-for-sale
U.S. Treasury obligations	$	241,696	$	1,681	$	672	$	242,705
U.S. Government-sponsored enterprise obligations	20,509		57		98		20,468
State and municipal bonds	513,111		11,155		1,559		522,707
Corporate debt	1,928,543		41,493		6,923		1,963,113
Residential mortgage-backed securities	475,368		5,513		2,972		477,909
Agency commercial mortgage-backed securities	14,531		460		49		14,942
Other commercial mortgage-backed securities	216,595		3,545		1,116		219,024
Other asset-backed securities	440,536		3,661		929		443,268
	$	3,850,889	$	67,565	$	14,318	$	3,904,136

	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

30

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

The recorded cost basis and estimated fair value of available-for-sale fixed maturities at September 30, 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	$	241,696	$	19,945	$	133,884	$	86,726	$	2,150	$	242,705
U.S. Government-sponsored enterprise obligations	20,509		3,826		11,363		5,134		145		20,468
State and municipal bonds	513,111		15,273		174,664		188,717		144,053		522,707
Corporate debt	1,928,543		119,700		927,016		809,889		106,508		1,963,113
Residential mortgage-backed securities	475,368										477,909
Agency commercial mortgage-backed securities	14,531										14,942
Other commercial mortgage-backed securities	216,595										219,024
Other asset-backed securities	440,536										443,268
	$	3,850,889									$	3,904,136

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 September 30, 2021.

Cash and securities with a carrying value of $54.8 million at September 30, 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 September 30, 2021, ProAssurance's FAL investments were comprised of available-for-sale fixed maturities with a fair value of $64.3 million and cash and cash equivalents of $8.2 million on deposit with Lloyd's in order to satisfy these FAL requirements. During the second quarter of 2021, ProAssurance received a return of approximately $24.5 million of FAL given the reduction in the Company's participation in the results of Syndicate 1729, to 5% from 29%, and Syndicate 6131, to 50% from 100%, for the 2021 underwriting year.

31

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Investments Held in a Loss Position

The following tables provide summarized information with respect to investments held in an unrealized loss position at September 30, 2021 and December 31, 2020, including the length of time the investment had been held in a continuous unrealized loss position.

	September 30, 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	$	162,063	$	672	$	157,445	$	582	$	4,618	$	90
U.S. Government-sponsored enterprise obligations	14,422		98		14,422		98		—		—
State and municipal bonds	194,740		1,559		192,610		1,467		2,130		92
Corporate debt	637,694		6,923		607,003		6,134		30,691		789
Residential mortgage-backed securities	284,636		2,972		276,253		2,732		8,383		240
Agency commercial mortgage-backed securities	4,040		49		4,040		49		—		—
Other commercial mortgage-backed securities	77,254		1,116		72,541		783		4,713		333
Other asset-backed securities	166,667		929		162,161		867		4,506		62
	$	1,541,516	$	14,318	$	1,486,475	$	12,712	$	55,041	$	1,606

	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 September 30, 2021, excluding U.S. Government or U.S. Government-sponsored enterprise obligations, there were 1,246 debt securities (32.3% of all available-for-sale fixed maturity securities held) in an unrealized loss position representing 768 issuers. The greatest and second greatest unrealized loss positions among those securities were approximately $0.3 million and $0.2 million, respectively. The securities were evaluated for impairment as of September 30, 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.

32

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Fixed maturity securities held in an unrealized loss position at September 30, 2021, excluding asset-backed securities, have paid all scheduled contractual payments and are expected to continue. 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 September 30, 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 nine months ended September 30, 2021 and three and nine months ended September 30, 2020. There was no change in the allowance for expected credit losses for the three months ended September 30, 2021.

	Nine Months Ended September 30, 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 September 30, 2021	$	—	$	—

	Three Months Ended September 30, 2020
(In thousands)	Corporate Debt		Total
Balance, at July 1, 2020	$	1,408	$	1,408
Reductions related to:
Securities sold during the period	(856)		(856)
Balance, at September 30, 2020	$	552	$	552

	Nine Months Ended September 30, 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	1,508		1,508
Reductions related to:
Securities sold during the period	(956)		(956)
Balance, at September 30, 2020	$	552	$	552

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

	Three Months Ended September 30				Nine Months Ended September 30
(In millions)	2021		2020		2021		2020
Proceeds from sales (exclusive of maturities and paydowns)	$	85.4	$	86.9	$	343.5	$	304.6
Purchases	$	404.1	$	317.5	$	1,169.6	$	689.4

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 September 30, 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.

33

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

BOLI

ProAssurance holds BOLI policies that are carried at the current cash surrender value of the policies (original cost $43 million), which includes the BOLI policies acquired from NORCAL (original cost $10 million). All insured individuals were members of ProAssurance or NORCAL 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.

Net Investment Income

Net investment income by investment category was as follows:

	Three Months Ended September 30				Nine Months Ended September 30
(In thousands)	2021		2020		2021		2020
Fixed maturities	$	20,121	$	16,902	$	53,969	$	52,863
Equities	648		706		1,790		3,598
Short-term investments, including Other	587		405		1,539		2,386
BOLI	622		655		1,752		1,568
Investment fees and expenses	(2,700)		(1,744)		(7,337)		(4,538)
Net investment income	$	19,278	$	16,924	$	51,713	$	55,877

Investment in Unconsolidated Subsidiaries

ProAssurance's investment in unconsolidated subsidiaries were as follows:

	September 30, 2021	Carrying Value
(In thousands)	Percentage Ownership	September 30, 2021		December 31, 2020
Qualified affordable housing project tax credit partnerships	See below	$	15,980	$	27,719
All other investments, primarily investment fund LPs/LLCs	See below	301,889		282,810
		$	317,869	$	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 2 of the tax credit partnership interests is almost 100%; these interests had a carrying value of $4.9 million at September 30, 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 $11.1 million at September 30, 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 13.

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 4 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 $49.2 million at September 30, 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 $252.7 million at September 30, 2021 and $236.6 million at December 31, 2020. ProAssurance does not have the ability to exert control over any of these funds.

34

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 September 30				Nine Months Ended September 30
(In thousands)	2021		2020		2021		2020
Qualified affordable housing project tax credit partnerships
Losses recorded	$	3,591	$	4,798	$	11,712	$	14,152
Tax credits recognized	$	3,226	$	4,369	$	9,880	$	13,106
Historic tax credit partnership*
Losses (gains) recorded	$	—	$	(264)	$	(182)	$	1,820
Tax credits recognized (reversed)	$	(100)	$	103	$	—	$	309
* ProAssurance holds a historic tax credit partnership which was fully amortized in 2020. ProAssurance received a distribution associated with this investment during the first quarter of 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 $3.1 million and $9.9 million for the three and nine months ended September 30, 2021, respectively, 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.

35

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 September 30				Nine Months Ended September 30
(In thousands)	2021		2020		2021		2020
Total impairment losses:
Corporate debt	$	—	$	—	$	—	$	(1,745)
Portion of impairment losses recognized in other comprehensive income before taxes:
Corporate debt	—		—		—		237
Net impairment losses recognized in earnings	—		—		—		(1,508)
Gross realized gains, available-for-sale fixed maturities	2,225		3,996		12,540		10,941
Gross realized (losses), available-for-sale fixed maturities	(259)		(396)		(798)		(2,266)
Net realized gains (losses), trading fixed maturities	(47)		116		17		268
Net realized gains (losses), equity investments	426		31		6,616		10,589
Net realized gains (losses), other investments	1,699		530		6,192		2,442
Change in unrealized holding gains (losses), trading fixed maturities	(49)		373		(489)		637
Change in unrealized holding gains (losses), equity investments	(945)		2,766		(2,182)		(21,012)
Change in unrealized holding gains (losses), convertible securities, carried at fair value	(2,457)		1,170		(2,118)		(190)
Other	(63)		252		434		249
Net realized investment gains (losses)	$	530	$	8,838	$	20,212	$	150

ProAssurance did not recognize any credit-related impairment losses in earnings or non-credit impairment losses in OCI during the three and nine months ended September 30, 2021 or the three months ended September 30, 2020. ProAssurance recognized credit-related impairment losses in earnings of $1.5 million and a nominal amount of non-credit impairment losses in OCI for the nine months ended September 30, 2020. The credit-related impairment losses recognized during the 2020 nine-month period related to corporate bonds in the energy and consumer sectors. Additionally, the 2020 nine-month period included credit-related impairment losses related to four corporate bonds in various sectors, which were sold during 2020. The non-credit related impairment losses recognized during the 2020 nine-month period related to three corporate bonds in the energy and consumer sectors.

ProAssurance recognized $0.5 million and $20.2 million of net realized investment gains during the three and nine months ended September 30, 2021, respectively, driven primarily by realized gains on the sale of certain available-for-sale fixed maturities and other investments, which were partially offset by unrealized holding losses resulting from changes in the fair value of our convertible securities. ProAssurance recognized $8.8 million and $0.2 million of net realized investment gains during the three and nine months ended September 30, 2020, respectively. Net realized investment gains during the 2020 three-month period were driven by gains in the Company's available-for-sale fixed maturities due to the sale of corporate bonds and, to a lesser extent, unrealized holding gains resulting from an increase in the fair value of the Company's equity portfolio and convertible securities. Net realized investment gains for the 2020 nine-month period were driven by realized gains on the sale of available-for-sale fixed maturities and equity investments and, to a lesser extent, unrealized holding gains on trading securities, which were almost entirely offset by unrealized holding losses resulting from decreases in the fair value of the Company's equity portfolio due to the volatility in the global financial markets related to COVID-19.

36

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

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 September 30				Nine Months Ended September 30
(In thousands)	2021		2020		2021		2020
Balance, beginning of period	$	—	$	1,322	$	552	$	470
Additional credit losses recognized during the period, related to securities for which:
No impairment has been previously recognized	—		—		—		1,064
Impairment has been previously recognized	—		—		—		258
Reductions due to:
Securities sold during the period (realized)	—		(770)		(552)		(1,240)
Balance, September 30	$	—	$	552	$	—	$	552

5. Retroactive Insurance Contracts

ProAssurance offers custom alternative risk solutions which include 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. In the first quarter of 2021, 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 Statements of Income and Comprehensive Income. 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.

6. 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. For the nine months ended September 30, 2021, ProAssurance utilized the discrete effective tax rate method to record its provision for income taxes after the estimated annual effective tax rate method produced an unreliable estimated annual tax rate. The discrete effective tax rate method is applied when the application of the estimated annual effective tax rate method is impractical because it is not possible to reliably estimate the annual effective tax rate. The Company believes the use of the discrete effective tax rate method is more appropriate for the current period than the annual effective tax rate method as minor changes in the Company's estimated ordinary income would result in sizable variations in the customary relationship between income tax expense (benefit) and pretax accounting income (loss).

For the nine months ended September 30, 2021, 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 due to the gain on bargain purchase of $74.4 million as a result of the Company's acquisition of NORCAL, all of which was non-taxable. See further discussion on the gain on bargain purchase in Note 2. In addition, the provision for income taxes is also different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes 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. Furthermore, the Company's pre-tax loss for the nine months ended September 30, 2020 included a $161.1 million goodwill impairment recognized in relation to the Specialty P&C reporting unit during the third quarter of 2020 which was treated as a discrete item as the Company considered it to be an unusual and infrequent item. Of the $161.1 million goodwill impairment, $149.6 million was non-deductible for which no tax benefit was recognized while the remaining $11.5 million was deductible for which a 21% tax benefit was recognized. See further discussion on this goodwill impairment in Note 1 and Note 6 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K.

37

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

ProAssurance had a receivable for U.S. federal and U.K. income taxes carried as a part of other assets of $6.7 million at September 30, 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 September 30, 2021 and December 31, 2020, respectively, which included an accrued liability for interest of approximately $0.6 million and $0.5 million, respectively.

NORCAL Acquisition

As a result of ProAssurance's acquisition of NORCAL, the Company recorded $46.8 million of net deferred tax assets reflecting the remeasurement of NORCAL's historical net deferred tax assets, as such deferred taxes were subject to recalculation following application of all purchase accounting adjustments, and management's assessment of the realizability of NORCAL's deferred tax assets. Also as a result of the NORCAL acquisition, ProAssurance has U.S. federal NOL carryforwards of approximately $68.0 million that will begin to expire in 2035. ProAssurance currently expects to utilize a portion of these NOLs in 2021. See Note 2 for more information.

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 2019 and 2020 for up to five years. The Company has an NOL of approximately $33.3 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 $11.7 million. Additionally, the Company had an NOL of approximately $25.6 million from the 2019 tax year that 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 September 30, 2021.

38

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

7. 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 acquired and liabilities assumed, 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 15. 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 5 reporting units, 2 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 September 30, 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 September 30, 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.

39

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

8. 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, 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 September 30, 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.

Acquired Reserve

The acquisition of NORCAL increased ProAssurance's net reserves by $1.1 billion which represented the fair value of NORCAL's reserve, net of related reinsurance recoverables, at the time of acquisition including a fair value adjustment on the reserve as well as negative VOBA recorded on NORCAL's unearned premium and DDR reserve. The reserve fair value adjustment will be amortized utilizing loss payment patterns and the negative VOBAs will be amortized over a period in proportion to the earn-out of the premium or in-line with the approximate consumption of losses. Such amortization is recorded as a reduction to net losses and loss adjustment expenses. See Note 2 for more information.

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.

40

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

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

(In thousands)	Nine Months Ended September 30, 2021		Nine Months Ended September 30, 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 reserves acquired from NORCAL acquisition	1,089,103		—		—
Net losses:
Current year(1)(2)(3)	582,235		555,969		711,846
Favorable development of reserves established in prior years, net	(27,205)		(34,557)		(50,399)
Total	555,030		521,412		661,447
Paid related to:
Current year	(62,276)		(60,449)		(83,204)
Prior years	(457,578)		(400,930)		(501,969)
Total paid	(519,854)		(461,379)		(585,173)
Net balance, end of period	3,156,371		2,015,851		2,032,092
Plus reinsurance recoverables on unpaid losses and loss adjustment expenses	476,315		391,637		385,087
Balance, end of period	$	3,632,686	$	2,407,488	$	2,417,179

(1) Current year net losses for the nine months ended September 30, 2021 included $4.3 million of amortization of the negative VOBA associated with NORCAL's assumed unearned premium, which is being amortized over a period in proportion to the earn-out of the associated premium as a reduction to current accident year net losses (see Note 2). Additionally, current year net losses for the nine months ended September 30, 2021 included $5.1 million related to a Custom Physician tail policy in the Specialty P&C segment.

(2) Current year net losses for the nine months ended September 30, 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 5).

(3) Current year net losses for the nine months ended September 30, 2020 and the year ended December 31, 2020 included the impact of a large national healthcare account in the Specialty P&C segment including losses of $60.0 million associated with a tail policy and $9.2 million of amortization of a related PDR. For additional information, see Note 7 of the Notes to Consolidated Financial Statements included in ProAssurance's December 31, 2020 report on Form 10-K.

Estimating liability reserves is complex and requires the use of many assumptions. As time passes and ultimate losses for prior years are either known or become subject to a more precise estimation, ProAssurance increases or decreases the reserve estimates established in prior periods. The consolidated net favorable loss development recognized in the nine months ended September 30, 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 through 2020 accident years. The net favorable development recognized in the Specialty P&C segment also included $5.0 million related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed net reserve and amortization of the negative VOBA associated with NORCAL's DDR reserve which is recorded as a reduction to prior accident year net losses and loss adjustment expenses (see Note 2). ProAssurance did not recognize any development related to NORCAL's prior accident year reserves since the date of acquisition. Net favorable prior accident year reserve development recognized in the Specialty P&C segment also included a $1.0 million reduction in our IBNR reserve for COVID-19. 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 and, to a lesser extent, the 2019 accident year. The net favorable loss development recognized in the Segregated Portfolio Cell Reinsurance segment is primarily related to the 2019 accident year and prior and, to a lesser extent, the 2020 accident year. Consolidated net favorable loss development recognized in the nine months ended September 30, 2021 was partially offset by unfavorable reserve development recognized in the Lloyd's Syndicates segment driven by certain catastrophe related losses.

41

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

The net favorable loss development recognized during the nine months ended September 30, 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 2018 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 2016 through 2018 accident years and the net favorable loss development recognized in the Workers' Compensation Insurance segment primarily related to the 2013 through 2016 accident years and accident years prior to 2010.

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.

9. 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 September 30, 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 million (approximately $40.4 million as of September 30, 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 September 30, 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 $72.5 million at September 30, 2021 (see Note 4). During the second quarter of 2021, ProAssurance received a return of approximately $24.5 million of cash and cash equivalents from the Company's FAL balances given the reduction in the Company's participation in the results of Syndicate 1729, to 5% from 29%, and Syndicate 6131, to 50% from 100%, for the 2021 underwriting year.

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 September 30, 2021, ProAssurance had total funding commitments related to non-public investment entities as well as the short-term loan commitment of approximately $221.6 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 September 30, 2021.

The purchase consideration in the NORCAL acquisition included contingent consideration. NORCAL policyholders who elected to receive NORCAL stock and tender it to ProAssurance are eligible for a share of contingent consideration in an amount of up to approximately $84 million depending upon the after-tax development of NORCAL's ultimate net losses

42

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

between December 31, 2020 and December 31, 2023. The estimated fair value of this contingent consideration was $24 million as of September 30, 2021, which did not change from June 30, 2021, and was derived utilizing a stochastic model. This estimate does not guarantee that contingent consideration will ultimately be paid. Depending on NORCAL's actual ultimate net loss development between December 31, 2020 and December 31, 2023, the actual amount due to eligible policyholders may be greater than or less than the $24 million current fair value estimate. See further discussion around the contingent consideration in Note 2 and Note 3.

10. Leases

ProAssurance is involved in a number of operating leases that are primarily for office facilities. Office facility leases have remaining lease terms ranging from one year to ten 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. As a result of ProAssurance's acquisition of NORCAL, the Company recorded $4.4 million of additional operating lease ROU assets and $5.3 million of additional operating lease liabilities during the second quarter of 2021. See Note 2 for more information.

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 and nine months ended September 30, 2021 and 2020.

(In thousands)	Location in the Condensed Consolidated Statements of Income and Comprehensive Income	Three Months Ended September 30				Nine Months Ended September 30
		2021		2020		2021		2020
Operating lease expense (1)	Operating expense	$	1,425	$	905	$	3,577	$	3,421
Sublease income (2)	Other income	(66)		(42)		(190)		(118)
Net lease expense		$	1,359	$	863	$	3,387	$	3,303

(1) Includes short-term lease costs and variable lease costs, if applicable. For the three and nine months ended September 30, 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 and $1.8 million during the three and nine months ended September 30, 2021, respectively, as compared to $0.7 million and $1.9 million during the same respective periods of 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 September 30, 2021 and December 31, 2020.

($ in thousands)	September 30, 2021			December 31, 2020
Operating lease ROU assets	$	20,253		$	19,013
Operating lease liabilities	$	21,670		$	20,116
Weighted-average remaining lease term	7.03 years			8.31 years
Weighted-average discount rate	2.84		%	2.97		%

The following table provides supplemental lease information for the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020.

	Nine Months Ended September 30
(In thousands)	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	4,145	$	3,123

43

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 September 30, 2021. Operating lease payments exclude $0.5 million of future minimum lease payments for 1 lease signed but not yet commenced as of September 30, 2021. This lease will commence in the fourth quarter of 2021 with a lease term of approximately ten years.

(In thousands)
2021	$	1,630
2022	5,169
2023	3,820
2024	2,475
2025	1,969
Thereafter	8,876
Total future minimum lease payments	23,939
Less: Imputed interest	2,269
Total operating lease liabilities	$	21,670

11. Debt

ProAssurance’s outstanding debt consisted of the following:

($ in thousands)	September 30, 2021		December 31, 2020
Senior Notes due 2023, unsecured, interest at 5.3% annually	$	250,000	$	250,000
Contribution Certificates due 2031, interest at 3.0% (effective interest rate at 4.35%) annually beginning April 2022	175,766		—
Mortgage Loans, outstanding borrowings were secured by first priority liens on two office buildings, and bore an interest rate of three-month LIBOR plus 1.325% (1.58% at December 31, 2020) determined quarterly	—		36,113
Total principal	425,766		286,113
Less unamortized debt issuance costs	1,008		1,400
Debt less unamortized debt issuance costs	$	424,758	$	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. In August 2021, ProAssurance repaid the balance outstanding on the Revolving Credit Agreement of $15 million. As of September 30, 2021 and December 31, 2020, there were no outstanding borrowings on the Revolving Credit Agreement.

Contribution Certificates

On May 5, 2021, NORCAL Insurance Company, successor to NORCAL Mutual Insurance Company, issued Contribution Certificates, which are due in 2031, to certain NORCAL policyholders in the conversion. The Contribution Certificates have a principal amount of $191 million and were recorded at their fair value of $175 million at the date of acquisition. The difference of $16 million between the recorded acquisition date fair value and the principal balance of the Contribution Certificates will be accreted utilizing the effective interest method over the term of the certificates of ten years as an increase to interest expense. In addition, interest payments are subject to deferral if ProAssurance does not receive permission from the California Department of Insurance prior to payment. See Note 2 for additional information on the Contribution Certificates assumed in the NORCAL acquisition.

44

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Mortgage Loans

During 2017, two of ProAssurance's subsidiaries, ProAssurance Indemnity Company, Inc. and ProAssurance Insurance Company of America, each entered into ten-year mortgage loans (Mortgage Loans) with principal amounts of $17.9 million and $22.6 million, respectively, with one lender in connection with the recapitalization of two office buildings. In June 2021, ProAssurance repaid the balance outstanding on the ProAssurance Indemnity Company, Inc. Mortgage Loan of $15.6 million. In July 2021, ProAssurance repaid the balance outstanding on the ProAssurance Insurance Company of America Mortgage Loan of $19.7 million. Interest expense on the Mortgage Loans during the three and nine months ended September 30, 2021 included the write-off of the unamortized debt issuance costs which were nominal in amount.

Covenant Compliance

There are no financial covenants associated with the Senior Notes or the Contribution Certificates due 2023 and 2031, respectively.

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. In April 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 was previously filed as Exhibit 10.1 to ProAssurance's March 31, 2021 report on Form 10-Q.

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.

12. Shareholders’ Equity

At September 30, 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 per share during each of the first three quarters of 2021, $0.31 per share during the first quarter of 2020 and $0.05 per share during each of the second and third quarters of 2020. Dividends declared during the 2021 and 2020 nine-month periods totaled $8.1 million and $22.1 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 September 30, 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 nine months ended September 30, 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%. OCI included a deferred tax benefit of $3.2 million and $8.3 million for the three and nine months ended September 30, 2021, respectively, as compared to a deferred tax expense of $1.9 million and $7.7 million for the same respective periods of 2020.

45

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

The changes in the balance of each component of AOCI for the three and nine months ended September 30, 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, July 1, 2021	$	53,168	$	—	$	(96)	$	53,072
OCI, before reclassifications, net of tax	(10,158)		—		—		(10,158)
Amounts reclassified from AOCI, net of tax	(1,503)		—		96		(1,407)
Net OCI, current period	(11,661)		—		96		(11,565)
Balance, September 30, 2021	$	41,507	$	—	$	—	$	41,507
(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	(24,655)		—		8		(24,647)
Amounts reclassified from AOCI, net of tax	(9,226)		57		96		(9,073)
Net OCI, current period	(33,881)		57		104		(33,720)
Balance, September 30, 2021	$	41,507	$	—	$	—	$	41,507

(In thousands)	Unrealized Investment Gains (Losses)		Non-credit Impairments		Unrecognized Change in Defined Benefit Plan Liabilities*		Accumulated Other Comprehensive Income (Loss)
Balance, July 1, 2020	$	61,912	$	(704)	$	(78)	$	61,130
OCI, before reclassifications, net of tax	9,505		—		(22)		9,483
Amounts reclassified from AOCI, net of tax	(2,975)		647		—		(2,328)
Net OCI, current period	6,530		647		(22)		7,155
Balance, September 30, 2020	$	68,442	$	(57)	$	(100)	$	68,285
(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	$	37,333	$	(300)	$	(78)	$	36,955
OCI, before reclassifications, net of tax	37,199		(187)		(22)		36,990
Amounts reclassified from AOCI, net of tax	(6,090)		430		—		(5,660)
Net OCI, current period	31,109		243		(22)		31,330
Balance, September 30, 2020	$	68,442	$	(57)	$	(100)	$	68,285
* The Company terminated Eastern's defined benefit plan, effective September 30, 2021, resulting in a settlement of the liabilities under the plan and the net loss previously reflected in AOCI being recognized in earnings for the three and nine months ended September 30, 2021. As a result of the NORCAL acquisition, the Company sponsors another frozen defined benefit plan (see Note 16). Due to the application of GAAP purchase accounting (see Note 2), there were no amounts recorded in AOCI related to this plan as of September 30, 2021 as the plan assets and benefit obligation are not remeasured on a quarterly basis.

46

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

13. 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 $284.7 million at September 30, 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 of these VIEs is limited to its direct ownership interest in the VIE. Except for the funding commitments disclosed in Note 9, ProAssurance has no arrangements with any of these VIEs to provide other financial support to or on behalf of the VIE. At September 30, 2021, ProAssurance’s maximum loss exposure relative to these investments was limited to the carrying value of ProAssurance’s investment in the VIE.

As a result of the Company's acquisition of NORCAL (see Note 2), ProAssurance is the primary beneficiary of PPM RRG. While there is no direct ownership of PPM RRG by ProAssurance, it manages the business operations of PPM RRG through its management services agreement and has effective control of the PPM RRG's Board of Directors through an irrevocable voting proxy. The management services agreement allows ProAssurance to provide management and oversight services to the RRG, which includes the ability to make business decisions impacting the operations of PPM RRG. PPM RRG has a $5 million surplus note to NORCAL which is its only source of capital. ProAssurance has consolidated the account balances and transactions of PPM RRG beginning on the NORCAL acquisition date of May 5, 2021. At September 30, 2021, approximately $145 million of ProAssurance's assets and $145 million of its liabilities included on the Condensed Consolidated Balance Sheet were related to PPM RRG.

14. 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 September 30				Nine Months Ended September 30
	2021		2020		2021		2020
Weighted average number of common shares outstanding, basic	53,982		53,889		53,955		53,854
Dilutive effect of securities:
Restricted Share Units	92		29		84		41
Performance Share Units	4		—		3		1
Weighted average number of common shares outstanding, diluted	54,078		53,918		54,042		53,896
Effect of dilutive shares on earnings (loss) per share	$	—	$	—	$	(0.01)	$	—

The diluted weighted average number of common shares outstanding for the three and nine months ended September 30, 2021 excludes approximately 37,000 and 25,000, respectively, of common share equivalents issuable under the Company's stock compensation plans, as compared to approximately 177,000 and 119,000 during the same respective periods of 2020, as their effect would have been antidilutive.

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. For the three and nine months ended September 30, 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.

47

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

15. 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 operates in 5 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. 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. During the second quarter of 2021, the Company reevaluated its segment reporting structure due to the acquisition of NORCAL (see Note 2) and concluded no changes in the Company's segments were required as a result of the acquisition as there was no change to the Company's internal management reporting structure. As NORCAL is an underwriter of healthcare professional liability insurance, NORCAL's underwriting results, since the date of acquisition, are included in the Specialty P&C segment while NORCAL's investment results, since the date of acquisition, are included in the Corporate segment. A description of each of ProAssurance's 5 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 Specialty P&C segment's professional liability insurance also includes the business acquired through the NORCAL transaction that closed on May 5, 2021, as previously discussed. 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 was not reflected in its results until the second quarter of 2021.

48

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

Corporate includes ProAssurance's investment operations, including the investment operations of NORCAL since the date of acquisition and excludes 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 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 goodwill or intangible asset impairments, a gain on bargain purchase or transaction-related costs for completed business combinations, including any related tax impacts, 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 September 30, 2021
(In thousands)	Specialty P&C		Workers' Compensation Insurance		Segregated Portfolio Cell Reinsurance		Lloyd's Syndicates		Corporate		Inter-segment Eliminations		Consolidated
Net premiums earned	$	203,716	$	42,235	$	15,344	$	10,953	$	—	$	—	$	272,248
Net investment income	—		—		193		431		18,654		—		19,278
Equity in earnings (loss) of unconsolidated subsidiaries	—		—		—		—		15,244		—		15,244
Net realized gains (losses)	—		—		204		35		291		—		530
Other income (loss)(1)	860		437		—		283		1,542		(722)		2,400
Net losses and loss adjustment expenses	(176,490)		(31,364)		(8,693)		(6,846)		—		—		(223,393)
Underwriting, policy acquisition and operating expenses(1)	(36,147)		(13,521)		(4,758)		(3,909)		(6,872)		722		(64,485)
SPC U.S. federal income taxes(2)	—		—		(431)		—		—		—		(431)
SPC dividend (expense) income	—		—		(1,320)		—		—		—		(1,320)
Interest expense	—		—		—		—		(5,814)		—		(5,814)
Income tax benefit (expense)	—		—		—		—		(219)		—		(219)
Segment results	$	(8,061)	$	(2,213)	$	539	$	947	$	22,826	$	—	14,038
Reconciliation of segments to consolidated results:
Transaction-related costs, net(3)													(1,838)
Net income (loss)													$	12,200
Significant non-cash items:
Depreciation and amortization, net of accretion	$	1,956	$	903	$	397	$	17	$	6,973	$	—	$	10,246

49

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

	Nine Months Ended September 30, 2021
(In thousands)	Specialty P&C		Workers' Compensation Insurance		Segregated Portfolio Cell Reinsurance		Lloyd's Syndicates		Corporate		Inter-segment Eliminations		Consolidated
Net premiums earned	$	487,963	$	122,872	$	47,500	$	40,263	$	—	$	—	$	698,598
Net investment income	—		—		620		1,677		49,416		—		51,713
Equity in earnings (loss) of unconsolidated subsidiaries	—		—		—		—		33,959		—		33,959
Net realized gains (losses)	—		—		2,772		9		17,431		—		20,212
Other income (expense)(1)	2,800		1,730		2		864		3,786		(2,320)		6,862
Net losses and loss adjustment expenses	(417,890)		(85,323)		(26,560)		(25,257)		—		—		(555,030)
Underwriting, policy acquisition and operating expenses(1)	(91,369)		(38,519)		(15,078)		(15,219)		(19,050)		2,320		(176,915)
SPC U.S. federal income tax expense(2)	—		—		(1,291)		—		—		—		(1,291)
SPC dividend (expense) income	—		—		(5,926)		—		—		—		(5,926)
Interest expense	—		—		—		—		(14,203)		—		(14,203)
Income tax benefit (expense)	—		—		—		—		(1,369)		—		(1,369)
Segment results	$	(18,496)	$	760	$	2,039	$	2,337	$	69,970	$	—	56,610
Reconciliation of segments to consolidated results:
Gain on bargain purchase													74,408
Transaction-related costs, net(3)													(19,034)
Net income (loss)													$	111,984
Significant non-cash items:
Gain on bargain purchase													$	74,408
Depreciation and amortization, net of accretion	$	7,261	$	2,709	$	1,074	$	49	$	15,473	$	—	$	26,566

	Three Months Ended September 30, 2020
(In thousands)	Specialty P&C		Workers' Compensation Insurance		Segregated Portfolio Cell Reinsurance		Lloyd's Syndicates		Corporate		Inter-segment Eliminations		Consolidated
Net premiums earned	$	117,849	$	42,516	$	16,052	$	18,142	$	—	$	—	$	194,559
Net investment income	—		—		273		951		15,700		—		16,924
Equity in earnings (loss) of unconsolidated subsidiaries	—		—		—		—		4,853		—		4,853
Net realized gains (losses)	—		—		1,495		489		6,854		—		8,838
Other income (expense)(1)	726		441		12		411		775		(642)		1,723
Net losses and loss adjustment expenses	(102,951)		(26,455)		(6,858)		(9,317)		—		—		(145,581)
Underwriting, policy acquisition and operating expenses(1)	(28,074)		(14,983)		(5,036)		(6,938)		(5,044)		642		(59,433)
SPC U.S. federal income tax expense(2)	—		—		(871)		—		—		—		(871)
SPC dividend (expense) income	—		—		(3,854)		—		—		—		(3,854)
Interest expense	—		—		—		—		(3,881)		—		(3,881)
Income tax benefit (expense)	—		—		—		—		(2,141)		—		(2,141)
Segment results	$	(12,450)	$	1,519	$	1,213	$	3,738	$	17,116	$	—	11,136
Reconciliation of segments to consolidated results:
Goodwill impairment													(161,115)
Net income (loss)													$	(149,979)
Significant non-cash items:
Goodwill impairment													$	161,115
Depreciation and amortization, net of accretion	$	2,669	$	923	$	210	$	3	$	2,540	$	—	$	6,345

50

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

	Nine Months Ended September 30, 2020
(In thousands)	Specialty P&C		Workers' Compensation Insurance		Segregated Portfolio Cell Reinsurance		Lloyd's Syndicates		Corporate		Inter-segment Eliminations		Consolidated
Net premiums earned	$	365,305	$	129,437	$	49,780	$	61,186	$	—	$	—	$	605,708
Net investment income	—		—		832		3,236		51,809		—		55,877
Equity in earnings (loss) of unconsolidated subsidiaries	—		—		—		—		(22,065)		—		(22,065)
Net realized gains (losses)	—		—		894		1,100		(1,844)		—		150
Other income (expense)(1)	3,515		1,717		203		219		1,813		(1,799)		5,668
Net losses and loss adjustment expenses	(373,442)		(84,648)		(23,890)		(39,432)		—		—		(521,412)
Underwriting, policy acquisition and operating expenses(1)	(82,894)		(42,604)		(15,474)		(23,373)		(17,632)		1,799		(180,178)
SPC U.S. federal income tax expense(2)	—		—		(1,573)		—		—		—		(1,573)
SPC dividend (expense) income	—		—		(7,988)		—		—		—		(7,988)
Interest expense	—		—		—		—		(11,725)		—		(11,725)
Income tax benefit (expense)	—		—		—		29		48,592		—		48,621
Segment results	$	(87,516)	$	3,902	$	2,784	$	2,965	$	48,948	$	—	(28,917)
Reconciliation of segments to consolidated results:
Goodwill impairment													(161,115)
Net income (loss)													$	(190,032)
Significant non-cash items:
Goodwill impairment													$	161,115
Depreciation and amortization, net of accretion	$	5,930	$	2,771	$	371	$	26	$	7,070	$	—	$	16,168
(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.
(3) Represents the transaction-related costs, after-tax, associated with the acquisition of NORCAL. Pre-tax transaction-related costs of $2.3 million and $23.5 million were included as a component of consolidated operating expense and the associated income tax benefit of $0.5 million and $4.5 million were included as a component of consolidated income tax benefit (expense) on the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2021, respectively.

51

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 September 30				Nine Months Ended September 30
(In thousands)	2021		2020		2021		2020
Specialty P&C Segment
Gross premiums earned:
HCPL	$	184,893	$	101,785	$	432,722	$	317,088
Small Business Unit	26,958		26,372		78,789		77,937
Medical Technology Liability	9,933		8,749		28,484		25,918
Other	172		138		494		671
Ceded premiums earned	(18,240)		(19,195)		(52,526)		(56,309)
Segment net premiums earned	203,716		117,849		487,963		365,305
Workers' Compensation Insurance Segment
Gross premiums earned:
Traditional business	45,331		45,620		130,767		138,628
Alternative market business	16,633		17,187		50,539		53,221
Ceded premiums earned	(19,729)		(20,291)		(58,434)		(62,412)
Segment net premiums earned	42,235		42,516		122,872		129,437
Segregated Portfolio Cell Reinsurance Segment
Gross premiums earned:
Workers' compensation(1)	15,846		16,476		48,215		51,178
HCPL(2)	1,649		1,699		5,675		5,099
Ceded premiums earned	(2,151)		(2,123)		(6,390)		(6,497)
Segment net premiums earned	15,344		16,052		47,500		49,780
Lloyd's Syndicates Segment
Gross premiums earned:
Property and casualty	13,262		22,777		50,282		77,309
Ceded premiums earned	(2,309)		(4,635)		(10,019)		(16,123)
Segment net premiums earned	10,953		18,142		40,263		61,186
Consolidated net premiums earned	$	272,248	$	194,559	$	698,598	$	605,708

(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.

52

ProAssurance Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021

16. Benefit Plans

ProAssurance assumed a defined benefit pension plan on May 5, 2021 as a result of its acquisition of NORCAL (see Note 2 for additional information), which covers substantially all NORCAL employees (except those that were previous employees of Medicus Insurance Company and FD Insurance Company, employees of PPM RRG as well as new hires after December 31, 2013). Benefits are based on years of service and the employee’s average of the highest five years of annual compensation. Annual contributions to the defined benefit pension plan are not less than the minimum funding standards outlined in the Employee Retirement Income Security Act of 1974, as amended. ProAssurance makes contributions to the defined benefit pension plan with the goal of ensuring that it is adequately funded to meet its future obligations. ProAssurance did not make any contributions to the pension plan during the period from May 5, 2021 to September 30, 2021 and does not anticipate making any contributions for the remainder of 2021. The defined benefit pension plan no longer has future service accruals or compensation increases because this plan was frozen effective December 31, 2015.

The weighted average discount rate used to determine the projected benefit obligation of the defined benefit pension plan as of the date of the NORCAL acquisition on May 5, 2021 was 2.95%. The weighted average discount rate and the weighted average expected return on plan assets used to determine net periodic benefit cost (credit) for the period from May 5, 2021 to December 31, 2021 was 2.95% and 3.75%, respectively.

The components of the net periodic benefit cost (credit) for the three and nine months ended September 30, 2021 were as follows:

($ in thousands)	Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
Components of net periodic benefit cost (credit):
Interest cost	$	779		1,253
Expected return on Plan assets	(896)			(1,538)
Total net periodic benefit cost (credit)*	$	(117)		$	(285)
*Net periodic benefit cost (credit) is included as a component of operating expense on the Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2021.

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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. Our professional liability insurance also includes the business acquired through the NORCAL transaction that closed on May 5, 2021. In addition, we 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 was not reflected in our results until the second quarter of 2021.

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•Corporate - This segment includes our investment operations, including the investment operations of NORCAL since the date of acquisition and excludes 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 15 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 September 30, 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, 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.

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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 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; predominantly 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. Given the consistent and prolonged nature of these favorable trends we began to recognize some of these favorable frequency trends in our HCPL current accident year reserve during the third quarter of 2021. We continue to remain cautious in recognizing these favorable trends 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. Claims frequency in 2021 continues to be below pre-pandemic levels in our Workers' Compensation Insurance segment, some of which is likely associated with the COVID-19 pandemic. While claims frequency is down, we have experienced an increase in 2021 accident year reported losses through September 30, 2021, including increased severity-related claim activity, which we primarily attribute to the current pandemic conditions and the impact of workers returning to full employment with the easing of pandemic-related restrictions in our operating territories, including the impact of labor shortages on the existing workforce. As a result of the increase in reported losses, we adjusted our current accident year loss ratio for the nine months ended September 30, 2021, during the third quarter of 2021. Our COVID-19 claim activity has trended downward through the first three quarters of 2021; however, 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

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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.

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, we reassess the amount of reserve required for prior accident years each period.

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.

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

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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 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 IBNR reserve related to COVID-19. While we continue to 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, we recognized net favorable prior accident year reserve development of $1 million associated with our COVID-19 IBNR reserve during the third quarter of 2021. At September 30, 2021, we maintain a $9 million IBNR reserve related to COVID-19 which represents our best estimate of future COVID-19 related losses not already captured by our claims process based on currently available information and reported incidents.

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.

Acquired Reserve

The acquisition of NORCAL increased our gross reserves by $1.2 billion which was the fair value of NORCAL's loss reserve at the time of acquisition. The fair value estimate of NORCAL's reserve for losses and loss adjustment expenses was based on three components: an actuarial estimate of the expected future net cash flows, a reduction to those cash flows for the time value of money determined utilizing the U.S. Treasury Yield Curve and a risk margin adjustment to reflect the net present value of profit that an investor would demand in return for the assumption of the development risk associated with the reserve. The fair value of NORCAL's gross reserve, including the risk margin adjustment, exceeded the actuarial estimate of NORCAL’s undiscounted loss reserve by approximately $42.2 million as of May 5, 2021. This fair value adjustment was recorded to the reserve for losses and loss adjustment expenses and will be amortized over a period utilizing loss payment patterns as a reduction to prior accident year net losses and loss adjustment expenses. See Note 2 of the Notes to Condensed Consolidated Financial Statements for more information.

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Investment Valuations

We record the majority of our investments at fair value as shown in the table below. At September 30, 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	7%	84%	1%	5%	97%
Other valuations					3%
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 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.

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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. During the third quarter of 2020, we recognized a nonrecurring fair value measurement related to the goodwill in our Specialty P&C reporting unit with a carrying value of $161.1 million prior to the fair value measurement. This nonrecurring fair value measurement resulted in the goodwill being written down to its implied fair value of zero resulting in an impairment of the goodwill of $161.1 million (see following discussion under the heading "Goodwill / Intangibles" and Note 7 of the Notes to Condensed Consolidated Financial Statements). The inputs used in the fair value measurement were non-observable and, as such, were categorized as a Level 3 valuation. We did not have any other assets or liabilities that were measured at fair value on a nonrecurring basis at September 30, 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 September 30, 2021, these investments represented approximately 3% of total investments, and are detailed in the following table. Additional information about these investments is provided in Note 3 and Note 4 of the Notes to Condensed Consolidated Financial Statements.

(In millions)	Carrying Value		GAAP Measurement Method
Other investments:
Other, principally FHLB capital stock	$	3.2	Principally Cost
Investment in unconsolidated subsidiaries:
Investments in tax credit partnerships	16.0		Equity
Equity method investments, primarily LPs/LLCs	50.2		Equity
	66.2
BOLI	80.8		Cash surrender value
Total investments - Other valuation methodologies	$	150.2

Impairments

We evaluate our available-for-sale investment securities, which at September 30, 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;

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•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.

Pension

As a result of our NORCAL acquisition, we sponsor a frozen defined benefit pension plan which covers substantially all NORCAL employees (except those that were previous employees of Medicus Insurance Company and FD Insurance Company, employees of PPM RRG as well as new hires after December 31, 2013). Accounting for pension benefits requires the use of assumptions for the valuation of the PBO and the expected performance of the plan assets.

We use December 31 as the measurement date for calculating our obligation related to this defined benefit pension plan. The PBO for pension benefits represents the present value of all future benefits earned as of the measurement date for vested and non-vested employees. At each measurement date, we review the various assumptions impacting the amounts recorded for the pension plan including the discount rates, which impacts the recorded value of the PBO and interest costs, and the expected return on plan assets.

To estimate the discount rate at the measurement date, we use a bond yield curve model, developed based on pricing and yield information for high quality corporate bonds. The assumption for the expected return on plan assets is based on the anticipated returns that will be earned by the portfolio over the long term. The expected return is influenced, but not determined, by historical portfolio performance.

Accounting standards provide for the delayed recognition of differences between actual results and expected or estimated results. This delayed recognition of the differences is amortized into earnings over time. The differences between actual results and expected or estimated results are recognized in full in AOCI. Amounts recognized in AOCI are reclassified to earnings in a systematic manner over the average future service period of participants. Due to the acquisition of NORCAL and the application of GAAP purchase accounting, there were no amounts recorded in AOCI as of September 30, 2021 as the plan assets and benefit obligation are not remeasured on a quarterly basis.

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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 Statements of Income and Comprehensive Income and as a component of the reserve for losses and loss adjustment expenses on our Condensed Consolidated Balance Sheets. During the three and nine months ended September 30, 2021 and 2020, 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. For the nine months ended September 30, 2021, we utilized the discrete effective tax rate method for recording income taxes after the estimated annual effective tax rate method produced an unreliable estimated annual effective tax rate. The discrete method is applied when the application of the estimated annual effective tax rate method is impractical and does not provide a reliable estimate of the annual effective tax rate. We believe the use of the discrete effective tax rate method is more appropriate than the annual effective tax rate method for the nine months ended September 30, 2021 as minor changes in our estimated ordinary income would have a significant effect on the estimated annual effective tax rate and would result in sizable variations in the customary relationship between income tax expense (benefit) and pre-tax accounting income (loss). For the nine months ended September 30, 2020, we utilized the estimated annual effective tax rate method. 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, NOL and 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 September 30, 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.

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U.S. Tax Legislation

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 our December 31, 2020 report on Form 10-K. We anticipate the temporary changes regarding NOL carryback provisions included in the CARES Act will have a favorable impact on our liquidity (see discussion that follows in the Liquidity and Capital Resources and Financial Condition section under the heading "Taxes").

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 September 30, 2021. See further discussion in Note 6 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 and nine months ended September 30, 2021 or 2020. At September 30, 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 15 of the Notes to Condensed Consolidated Financial Statements.

Interim Impairment Assessments

During the third quarter of 2020, we performed interim impairment assessments of the goodwill and definite and indefinite lived intangible assets in our Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units due to the significant market volatility impacting our actual and projected results along with a decline in our stock price. The goodwill analysis indicated an impairment of the goodwill associated with our Specialty P&C reporting unit and accordingly we recorded a $161.1 million charge to goodwill (see further discussion in Note 7 of the Notes to Condensed Consolidated Financial Statements). The analysis of our definite and indefinite lived intangible assets indicated no impairment at September 30, 2020.

There were no triggering events as of September 30, 2021 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

Annual Impairment Assessments

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 7 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.

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Acquired Intangibles

The acquisition of NORCAL added $14 million to identifiable intangible assets as of the acquisition date. Intangible assets acquired in the NORCAL acquisition included the following:

(In thousands)	Estimated Fair Value on Acquisition Date		Estimated Useful Life
Trade name	$	1,000	3
Licenses	13,000		Indefinite
Total	$	14,000

See further information on the intangible assets acquired in the NORCAL acquisition in Note 2 of the Notes to Condensed Consolidated Financial Statements and additional information regarding our goodwill and intangible assets is included in Note 1 and Note 6 of the Notes to Consolidated Financial Statements included in our December 31, 2020 report on Form 10-K.

Business Combinations

We accounted for our acquisition of NORCAL in accordance with GAAP relating to business combinations which required us to make certain estimates and assumptions including determining the fair value of the non-cash components of the acquisition consideration and the acquisition date fair values of the acquired tangible and identifiable intangible assets and assumed liabilities of NORCAL. Subsequent to the preliminary valuation of the non-cash components of the purchase consideration and net assets acquired, any adjustment identified associated with the purchase price allocation will be evaluated to determine whether the adjustment represents a measurement period adjustment in accordance with GAAP. If the adjustment is deemed to be a measurement period adjustment and is identified within one year of the acquisition, then the measurement period adjustment will be recorded in the current reporting period with a corresponding adjustment to the gain on bargain purchase.

Contingent Consideration

Contingent consideration in a business combination is recorded at fair value on the date of the acquisition and remeasured each subsequent reporting period with changes in fair value recognized in earnings. The purchase consideration in the NORCAL acquisition included contingent consideration with an acquisition date fair value of approximately $24 million. NORCAL policyholders who tendered NORCAL stock to ProAssurance are eligible for a share of contingent consideration in an amount of up to approximately $84 million depending upon the after-tax development of NORCAL's ultimate net losses between December 31, 2020 and December 31, 2023. The estimated fair value of this contingent consideration was $24 million as of September 30, 2021, which did not change from June 30, 2021, and was derived utilizing a stochastic model. This estimate does not guarantee that contingent consideration will ultimately be paid. Depending on NORCAL's actual ultimate net loss development between December 31, 2020 and December 31, 2023, the actual amount due to eligible policyholders may be greater than or less than the $24 million current fair value estimate. See further discussion around the contingent consideration in Note 2 and Note 9 of the Notes to Condensed Consolidated Financial Statements.

VOBA

VOBA is an intangible asset (or liability) that reflects the estimated fair value of in-force contracts acquired in an acquisition and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the business in-force at the acquisition date. VOBA is based on actuarially determined projections, and in instances where the in-force business is expected to generate an underwriting loss, the value of VOBA may be negative. Negative VOBA is reported in the reserve for losses and loss adjustment expenses on the Condensed Consolidated Balance Sheets.

We recognized negative VOBA of $11.7 million in connection with our acquisition of NORCAL, representing the value of future losses expected to be recognized over the lifetime of the contracts acquired determined using a discount rate and other relevant assumptions. The negative VOBA will be amortized over a period in proportion to the earn-out of the premium as a reduction to current accident year net losses and loss adjustment expenses on the Condensed Consolidated Statements of Income and Comprehensive Income. See Note 2 of the Notes to Condensed Consolidated Financial Statements for more information.

Gain on Bargain Purchase

As a result of the NORCAL acquisition, we recognized a gain on bargain purchase of $74.4 million during the second quarter of 2021 representing the excess of the fair value of the identifiable assets acquired and liabilities assumed over the purchase consideration. A gain on bargain purchase is recognized in earnings and is considered unusual, infrequent and non-recurring in nature. We exclude gains on bargain purchases from Non-GAAP operating income (loss) as they do not reflect normal operating results. See further discussion around the gain on bargain purchase recognized in the second quarter of 2021 from the NORCAL acquisition in Note 2 of the Notes to Condensed Consolidated Financial Statements.

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Accounting Changes

We did not have any change in accounting estimates or policy that had a material effect on our results of operations or financial position during the nine months ended September 30, 2021. We are not aware of any accounting changes not yet adopted as of September 30, 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 (excluding the acquired operating subsidiaries of NORCAL) 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 September 30, 2021, we held cash and liquid investments of approximately $57 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 November 3, 2021, no borrowings were outstanding under our Revolving Credit Agreement.

To date, during 2021, our operating subsidiaries have paid dividends to us of approximately $51 million. In the aggregate, our insurance subsidiaries, excluding NORCAL, are permitted to pay dividends of approximately $56 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).

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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 and Medical Technology Liability treaties renew annually on October 1. As of October 1, 2021, our HCPL treaty renewed with a reduction to the gross rate paid under the renewed treaty and also incorporates NORCAL policies. For the NORCAL excess of loss reinsurance arrangement in effect prior to October 1, 2021, NORCAL policies were reinsured under separate reinsurance agreements, primarily excess of loss, which have historically renewed annually on January 1. For the NORCAL excess of loss reinsurance arrangement that renewed on January 1, 2021, retention is generally the first $2 million in risk and coverages in excess of this amount are ceded up to $24 million. There were no significant changes in the cost or structure of our Medical Technology Liability treaty upon the latest renewal on October 1, 2021. Our Workers' Compensation treaty renews annually on May 1. Our traditional workers' compensation treaty renewed May 1, 2021 at a higher rate than the previous agreement, with an increase in the AAD to 3.50% from 3.16% 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. Effective October 1, 2021, limits can be reinstated a maximum of four times.

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

(3) Historically, retention has ranged from 2.5% to 32.5%.

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

(5) Includes an AAD where retention is 3.5% 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 $1 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.

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Cash Flows

Cash flows between periods compare as follows:

	Nine Months Ended September 30
(In thousands)	2021		2020		Change
Net cash provided (used) by:
Operating activities	$	69,363	$	73,173	$	(3,810)
Investing activities	(25,531)		21,999		(47,530)
Financing activities	(56,661)		(38,593)		(18,068)
Increase (decrease) in cash and cash equivalents	$	(12,829)	$	56,579	$	(69,408)

	Nine Months Ended September 30
(In thousands)	2020		2019		Change
Net cash provided (used) by:
Operating activities	$	73,173	$	128,803	$	(55,630)
Investing activities	21,999		(25,717)		47,716
Financing activities	(38,593)		(81,346)		42,753
Increase (decrease) in cash and cash equivalents	$	56,579	$	21,740	$	34,839

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 decrease in operating cash flows of $3.8 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was partially offset by additional net cash receipt from NORCAL of approximately $2.7 million primarily associated with net premium receipts, partially offset by transaction-related expenses. Excluding NORCAL, operating cash flows decreased by $6.5 million for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 primarily due to a decrease in net premium receipts of $52.8 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 and Syndicate 6131 for the 2021 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 and the effect of $14.3 million of tail premium received from a large national healthcare account during the second quarter of 2020 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). Additionally, the decrease in operating cash flows was due to a decrease in cash received from investment income of $15.4 million driven by a decrease in distributed earnings and redemptions from our portfolio of investments in LPs/LLCs. The decrease in operating cash flows was partially offset by a decrease in paid losses of $50.5 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 decrease in operating cash flows reflected a decrease in cash paid for operating expenses of $9.2 million driven by the effect of one-time expenses of $3.2 million primarily related to employee severance and early retirement benefits paid to certain employees during the third quarter of 2020. Furthermore, the decrease in cash paid for operating expenses reflected 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 and Syndicate 6131 for the 2021 underwriting year. The remaining variance in operating cash flows for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was comprised of individually insignificant components.

The decrease in operating cash flows for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 of $55.6 million was primarily due to an increase in paid losses of $85.8 million 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

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segment reflected the payment of a $10 million claim during the first quarter of 2020, as previously discussed. Additionally, the decrease in operating cash flows reflected a decrease in net cash received of $7.4 million associated with the cash settlement of the 2017 calendar year quota share reinsurance arrangement between our Specialty P&C segment and Syndicate 1729 due to the reduction in premiums ceded to Syndicate 1729. Furthermore, the decrease in operating cash flows also reflected the aforementioned one-time expenses of $3.2 million. The decrease in operating cash flows was somewhat offset by an increase in net premium receipts of $34.6 million, a decrease in 2020 net tax payments as compared to 2019 of $7.8 million and an increase in cash received from investment income of $3.8 million. The increase in net premium receipts was driven by our Specialty P&C segment due to $14.3 million of tail premium, as previously discussed. The decrease in net tax payments was primarily due to refunds received during the nine months ended September 30, 2020. The increase in cash received from investment income was primarily due to an increase in distributed earnings and redemptions from our portfolio of investments in LPs/LLCs. The remaining variance in operating cash flows for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 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."

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 and nine months ended September 30, 2021 or 2020.

As a result of the CARES Act that was signed into law on March 27, 2020, as previously discussed, we are now permitted to carryback NOLs generated in tax years 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 $33.3 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 $11.7 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. Furthermore, we received a tax refund of $1.3 million during the second quarter of 2021 due to the repeal of a previous election we made under the TCJA related to discounted loss reserves.

As a result of our acquisition of NORCAL, we recorded $46.8 million of net deferred tax assets reflecting the remeasurement of NORCAL's historical net deferred tax assets, as such deferred taxes were subject to recalculation following application of all purchase accounting adjustments and our assessment of the realizability of NORCAL's deferred tax assets. Also as a result of the NORCAL acquisition, we have U.S. federal NOL carryforwards of approximately $68.0 million that will begin to expire in 2035. We currently expect to utilize at portion of these NOL carryforwards in 2021.

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Investing Activities and Related Cash Flows

Our investments at September 30, 2021 and December 31, 2020 are comprised as follows:

	September 30, 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	$	242,705	5	%	$	107,059	3	%
U.S. Government-sponsored enterprise obligations	20,468		1	%	12,261		1	%
State and municipal bonds	522,707		10	%	332,920		10	%
Corporate debt	1,963,113		41	%	1,329,342		39	%
Residential mortgage-backed securities	477,909		10	%	276,541		8	%
Commercial mortgage-backed securities	233,966		5	%	126,402		4	%
Other asset-backed securities	443,268		9	%	273,006		8	%
Total fixed maturities, available-for-sale	3,904,136		81	%	2,457,531		73	%
Fixed maturities, trading	45,049		1	%	48,456		1	%
Total fixed maturities	3,949,185		82	%	2,505,987		74	%
Equity investments	214,530		4	%	120,101		4	%
Short-term investments	151,708		3	%	337,813		10	%
BOLI	80,821		2	%	67,847		2	%
Investment in unconsolidated subsidiaries	317,869		7	%	310,529		9	%
Other investments	110,012		2	%	47,068		1	%
Total investments	$	4,824,125	100	%	$	3,389,345	100	%

At September 30, 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:

	September 30, 2021				December 31, 2020
($ in thousands)	Carrying Value		% of Total Investment		Carrying Value		% of Total Investment
Rating*
AAA	$	1,165,022	30	%	$	717,187	29	%
AA+	127,707		3	%	103,996		4	%
AA	242,772		6	%	168,452		7	%
AA-	214,032		6	%	122,733		5	%
A+	246,534		6	%	197,274		8	%
A	526,078		14	%	323,044		13	%
A-	365,689		9	%	245,464		10	%
BBB+	277,641		7	%	189,971		8	%
BBB	310,325		8	%	190,385		8	%
BBB-	129,235		3	%	59,847		2	%
Below investment grade	293,004		7	%	133,607		5	%
Not rated	6,097		1	%	5,571		1	%
Total	$	3,904,136	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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Our acquisition of NORCAL added the following to our investment holdings as of May 5, 2021, the date of acquisition:

(In thousands)
Fixed maturities, available for sale	$	1,100,058
Equity investments	374,484
Short-term investments	61,289
BOLI	12,581
Investment in unconsolidated subsidiaries	26,948
Other investments	32,461
Total investments	$	1,607,821

A detailed listing of our investment holdings as of September 30, 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 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 $80 million and $100 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 11 of the Notes to Condensed Consolidated Financial Statements.

At September 30, 2021, our FAL was comprised of fixed maturity securities with a fair value of $64.3 million and cash and cash equivalents of $8.2 million deposited with Lloyd's. See further discussion in Note 4 of the Notes to Condensed Consolidated Financial Statements. We received a return of approximately $24.5 million of FAL during the second quarter of 2021, and we expect to receive a return of approximately $8.0 million of FAL during the fourth quarter of 2021 given the reduction in our participation in the results of Syndicate 1729 for the 2021 underwriting year.

Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 92% 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 September 30, 2021 was 3.63 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities was 3.50 years.

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

	Carrying Value				September 30, 2021
($ in thousands, except expected funding period)	September 30, 2021		December 31, 2020		Unfunded Commitment		Expected funding period in years
Qualified affordable housing project tax credit partnerships (1)	$	15,980	$	27,719	$	597	6
All other investments, primarily investment fund LPs/LLCs	301,889		282,810		145,993		4
Total	$	317,869	$	310,529	$	146,590
(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 September 30, 2021, we had investments in 33 separate investment funds with a total carrying value of $301.9 million which represented approximately 6% 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.

Acquisitions

On May 5, 2021, we completed the acquisition of NORCAL by purchasing 98.8% of the converted company stock in exchange for total consideration transferred of $449 million. On September 16, 2021, we acquired the remaining 1.2% interest in NORCAL for $3.1 million of cash. On May 5, 2021, ProAssurance funded the transaction with $248 million of cash on hand and NORCAL paid $2 million to policyholders who elected to receive the discounted cash option for their allocated share of the converted company's equity. Additional consideration with a principal amount of $191 million and a fair value of $175 million, is in the form of Contribution Certificates issued to certain NORCAL policyholders in the conversion, and those instruments are an obligation of NORCAL Insurance Company, the successor of NORCAL Mutual Insurance Company (see Note 11 of the Notes to Condensed Consolidated Financial Statements for further discussion of the terms of the Contribution Certificates). Policyholders who tendered NORCAL stock to ProAssurance are also eligible for a share of contingent consideration in an amount of up to approximately $84 million depending upon the after-tax development of NORCAL's ultimate net losses between December 31, 2020 and December 31, 2023. The estimated fair value of this contingent consideration was $24 million as of May 5, 2021 and September 30, 2021. 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 2 of the Notes to Condensed Consolidated Financial Statements.

Financing Activities and Related Cash Flows

Treasury Shares

During the nine months ended September 30, 2021 and 2020, we did not repurchase any common shares and, as of November 3, 2021, our remaining Board authorization was approximately $110 million.

ProAssurance Shareholder Dividends

Our Board declared quarterly cash dividends of $0.05 per share during each of the first three quarters of 2021, $0.31 per share during the first quarter of 2020 and $0.05 per share during each of the second and third quarters of 2020. 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.

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Debt

At September 30, 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.

NORCAL Insurance Company, successor to NORCAL Mutual Insurance Company, issued Contribution Certificates, which bear interest at 3.0% annually and are due in 2031, to certain NORCAL policyholders in the conversion. The Contribution Certificates have a principal amount of $191 million and were recorded at their fair value of $175 million at the date of acquisition. The difference of $16 million between the recorded acquisition date fair value and the principal balance of the Contribution Certificates will be accreted utilizing the effective interest method over the term of the certificates of ten years as an increase to interest expense. Furthermore, interest payments, which begin in April 2022, are subject to deferral if we do not receive permission from the California Department of Insurance prior to payment. See Note 2 and Note 11 of the Notes to Condensed Consolidated Financial Statements for additional information on the Contribution Certificates issued in the NORCAL acquisition. There are no financial covenants associated with these certificates.

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. In August 2021, we repaid the balance outstanding on the Revolving Credit Agreement of $15.0 million and, as of September 30, 2021, there were no outstanding borrowings; we are in compliance with the financial covenants of the Revolving Credit Agreement.

Two of our subsidiaries, ProAssurance Indemnity Company, Inc. and ProAssurance Insurance Company of America, had Mortgage Loans with one lender in connection with the recapitalization of two office buildings, with scheduled maturities in December 2027. The Mortgage Loans accrued interest at three-month LIBOR plus 1.325% with principal and interest payable on a quarterly basis. In June 2021, we repaid the balance outstanding on the ProAssurance Indemnity Company, Inc. Mortgage Loan of $15.6 million and, in July 2021, we repaid the balance outstanding on the ProAssurance Insurance Company of America Mortgage Loan of $19.7 million. Interest expense on the Mortgage Loans during the three and nine months ended September 30, 2021 included the write-off of the unamortized debt issuance costs which were nominal in amount.

Additional information regarding our debt is provided in Note 11 of the Notes to Condensed Consolidated Financial Statements.

Three 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 and Nine Months Ended September 30, 2021 Compared to Three and Nine Months Ended September 30, 2020

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

	Three Months Ended September 30									Nine Months Ended September 30
($ in thousands, except per share data)	2021			2020			Change			2021			2020			Change
Revenues:
Net premiums written	$	287,043		$	213,260		$	73,783		$	677,527		$	605,222		$	72,305
Net premiums earned	$	272,248		$	194,559		$	77,689		$	698,598		$	605,708		$	92,890
Net investment result	34,522			21,777			12,745			85,672			33,812			51,860
Net realized investment gains (losses)	530			8,838			(8,308)			20,212			150			20,062
Other income	2,400			1,723			677			6,862			5,668			1,194
Total revenues	309,700			226,897			82,803			811,344			645,338			166,006
Expenses:
Net losses and loss adjustment expenses	223,393			145,581			77,812			555,030			521,412			33,618
Underwriting, policy acquisition and operating expenses	66,812			59,433			7,379			200,450			180,178			20,272
SPC U.S. federal income tax expense	431			871			(440)			1,291			1,573			(282)
SPC dividend expense (income)	1,320			3,854			(2,534)			5,926			7,988			(2,062)
Interest expense	5,814			3,881			1,933			14,203			11,725			2,478
Goodwill impairment	—			161,115			(161,115)			—			161,115			(161,115)
Total expenses	297,770			374,735			(76,965)			776,900			883,991			(107,091)
Gain on bargain purchase	—			—			—			74,408			—			74,408
Income (loss) before income taxes	11,930			(147,838)			159,768			108,852			(238,653)			347,505
Income tax expense (benefit)	(270)			2,141			(2,411)			(3,132)			(48,621)			45,489
Net income (loss)	$	12,200		$	(149,979)		$	162,179		$	111,984		$	(190,032)		$	302,016
Non-GAAP operating income (loss)	$	13,766		$	2,559		$	11,207		$	42,452		$	(31,029)		$	73,481
Earnings (loss) per share:
Basic	$	0.23		$	(2.78)		$	3.01		$	2.08		$	(3.53)		$	5.61
Diluted	$	0.23		$	(2.78)		$	3.01		$	2.07		$	(3.53)		$	5.60
Non-GAAP operating income (loss) per share:
Basic	$	0.25		$	0.05		$	0.20		$	0.79		$	(0.58)		$	1.37
Diluted	$	0.25		$	0.05		$	0.20		$	0.79		$	(0.58)		$	1.37
Net loss ratio	82.1		%	74.8		%	7.3		pts	79.4		%	86.1		%	(6.7		pts)
Underwriting expense ratio	24.5		%	30.5		%	(6.0		pts)	28.7		%	29.7		%	(1.0		pts)
Combined ratio	106.6		%	105.3		%	1.3		pts	108.1		%	115.8		%	(7.7		pts)
Operating ratio	99.5		%	96.6		%	2.9		pts	100.7		%	106.6		%	(5.9		pts)
Effective tax rate	(2.3		%)	(1.4		%)	(0.9		pts)	(2.9		%)	20.4		%	(23.3		pts)
Return on equity*	4.0		%	(8.8		%)	12.8		pts	4.2		%	(14.1		%)	18.3		pts
*Annualized. See further discussion on this calculation in the Executive Summary of Operations section under the heading "ROE."
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 and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020. Our results for the three and nine months ended September 30, 2021 include NORCAL's results since the date of acquisition. 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 September 30								Nine Months Ended September 30
($ in thousands)	2021		2020		Change				2021		2020		Change
Net premiums earned
Specialty P&C	$	203,716	$	117,849	$	85,867	72.9	%	$	487,963	$	365,305	$	122,658	33.6	%
Workers' Compensation Insurance	42,235		42,516		(281)		(0.7	%)	122,872		129,437		(6,565)		(5.1	%)
Segregated Portfolio Cell Reinsurance	15,344		16,052		(708)		(4.4	%)	47,500		49,780		(2,280)		(4.6	%)
Lloyd's Syndicates	10,953		18,142		(7,189)		(39.6	%)	40,263		61,186		(20,923)		(34.2	%)
Consolidated total	$	272,248	$	194,559	$	77,689	39.9	%	$	698,598	$	605,708	$	92,890	15.3	%

For the three and nine months ended September 30, 2021, consolidated net premiums earned included additional earned premiums of approximately $82.9 million and $131.4 million, respectively, in our Specialty P&C segment from our acquisition of NORCAL. Excluding NORCAL, consolidated net premiums earned decreased $5.2 million and $38.5 million during the 2021 three- and nine-month periods, respectively, as compared to the same respective periods of 2020 driven by a decrease in net premiums in our Lloyd's Syndicates and Workers' Compensation Insurance segments and, for the 2021 nine-month period, our Specialty P&C segment. The decrease in our Lloyd's Syndicates segment was due to our decreased participation in the results of Syndicate 1729 and Syndicate 6131 for the 2021 underwriting year. 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 for the 2021 nine-month period. Net premiums earned in our Specialty P&C segment, excluding NORCAL, increased during the 2021 three-month period due to a decrease in ceded premiums earned 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. For the 2021 nine-month period, the decrease in net premiums earned in our Specialty P&C segment, excluding NORCAL, was driven by the prior year effect of a tail policy associated with a large national healthcare account which resulted in $14.3 million of one-time premium written and fully earned during the second quarter of 2020, partially offset by $7.8 million of tail premium written and fully earned during the second quarter of 2021 associated with a Custom Physician policy. In addition, net premiums earned in our Specialty P&C segment for the 2021 three- and nine-month periods reflected premium adjustments related to loss sensitive policies which decreased earned premium by $0.9 million and $0.1 million, respectively, as compared to an increase in earned premium of $2.3 million and $2.6 million for the same respective periods of 2020.

The following table shows our consolidated net investment result:

	Three Months Ended September 30								Nine Months Ended September 30
($ in thousands)	2021		2020		Change				2021		2020		Change
Net investment income	$	19,278	$	16,924	$	2,354	13.9	%	$	51,713	$	55,877	$	(4,164)	(7.5	%)
Equity in earnings (loss) of unconsolidated subsidiaries*	15,244		4,853		10,391		214.1	%	33,959		(22,065)		56,024		253.9	%
Net investment result	$	34,522	$	21,777	$	12,745	58.5	%	$	85,672	$	33,812	$	51,860	153.4	%
*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.

Our consolidated net investment result for the three and nine months ended September 30, 2021 included additional net investment income of approximately $5.1 million and $7.8 million, respectively, from NORCAL. Excluding NORCAL, consolidated net investment income decreased $2.8 million and $12.0 million during the 2021 three- and nine-month periods, respectively, as compared to the same respective periods of 2020 driven by lower yields on our corporate debt securities and short-term investments given the continued low interest rate environment and, to a lesser extent, lower income from our equity portfolio due to the reallocation in our mix of securities within this asset category. Furthermore, the decline in net investment

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income during the 2021 nine-month period reflected the impact of capital planning in anticipation of closing the NORCAL acquisition. In addition, our consolidated net investment result for the three and nine months ended September 30, 2021, included additional earnings from our acquired interests in four LPs from NORCAL of approximately $0.4 million; given the results of our investments in LPs/LLCs are often reported to us on a one-quarter lag, the impact of these acquired investments were not captured in our results until the current period. The increase in our investment results from our portfolio of investments in LPs/LLCs for the 2021 three- and nine-month periods as compared to the same respective periods of 2020 was due to higher earnings from several of our LPs/LLCs and, for the 2021 nine-month period, the prior year effect of the volatility in the global financial markets related to COVID-19.

Expenses

The following table shows our consolidated and segment net loss ratios and net prior accident year reserve development.

	Three Months Ended September 30									Nine Months Ended September 30
($ in millions)	2021			2020			Change			2021			2020			Change
Current accident year net loss ratio
Consolidated ratio	85.2		%	80.7		%	4.5		pts	83.3		%	91.8		%	(8.5		pts)
Specialty P&C	90.0		%	89.8		%	0.2		pts	89.7		%	107.9		%	(18.2		pts)
Workers' Compensation Insurance	77.8		%	66.9		%	10.9		pts	74.0		%	69.2		%	4.8		pts
Segregated Portfolio Cell Reinsurance	67.2		%	67.3		%	(0.1		pts)	66.3		%	63.3		%	3.0		pts
Lloyd's Syndicates	50.4		%	65.9		%	(15.5		pts)	54.5		%	66.5		%	(12.0		pts)
Calendar year net loss ratio
Consolidated ratio	82.1		%	74.8		%	7.3		pts	79.4		%	86.1		%	(6.7		pts)
Specialty P&C	86.6		%	87.4		%	(0.8		pts)	85.6		%	102.2		%	(16.6		pts)
Workers' Compensation Insurance	74.3		%	62.2		%	12.1		pts	69.4		%	65.4		%	4.0		pts
Segregated Portfolio Cell Reinsurance	56.7		%	42.7		%	14.0		pts	55.9		%	48.0		%	7.9		pts
Lloyd's Syndicates	62.5		%	51.4		%	11.1		pts	62.7		%	64.4		%	(1.7		pts)
Favorable (unfavorable) reserve development, prior accident years
Consolidated	$	8.6		$	11.5		$	(2.9)		$	27.2		$	34.6		$	(7.4)
Specialty P&C	$	6.8		$	2.9		$	3.9		$	20.0		$	20.7		$	(0.7)
Workers' Compensation Insurance	$	1.5		$	2.0		$	(0.5)		$	5.6		$	5.0		$	0.6
Segregated Portfolio Cell Reinsurance	$	1.6		$	4.0		$	(2.4)		$	4.9		$	7.6		$	(2.7)
Lloyd's Syndicates	$	(1.3)		$	2.6		$	(3.9)		$	(3.3)		$	1.3		$	(4.6)

The primary drivers of the change in our consolidated current accident year net loss ratio for the three and nine months ended September 30, 2021 as compared to the same periods of 2020 were as follows:

	Increase (Decrease)  2021 versus 2020
(In percentage points)	Comparative three-month periods	Comparative nine-month periods
Estimated ratio increase (decrease) attributable to:
NORCAL Operations	5.5 pts	3.4 pts
NORCAL Acquisition - Purchase Accounting Adjustment	(1.3 pts)	(0.8 pts)
Premium adjustments on loss sensitive policies	1.3 pts	0.5 pts
Large National Healthcare Account	— pts	(7.8 pts)
COVID-19 IBNR Reserve	— pts	(1.7 pts)
All other, net	(1.0 pts)	(2.1 pts)
Increase (decrease) in the consolidated current accident year net loss ratio	4.5 pts	(8.5 pts)

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Excluding the impact of the items specifically identified in the table above, our consolidated current accident year net loss ratios for the three and nine months ended September 30, 2021 decreased 1.0 and 2.1 percentage points, respectively, driven by our Specialty P&C and Lloyd's Syndicates segments, somewhat offset by a higher ratio in our Workers' Compensation segment. The improvement in the current accident year net loss ratio in our Specialty P&C segment was driven by decreases to certain loss ratios during the first quarter of 2021 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. In addition, the lower current accident year net loss ratio in our Specialty P&C segment reflected an additional reduction in certain loss ratios in our Standard Physician line of business during the third quarter of 2021 related to favorable frequency trends. For our Lloyd's Syndicates segment, the lower current accident year net loss ratio reflected decreases in certain loss ratios during the current period and, for the 2021 nine-month period, higher reinsurance recoveries as a proportion of gross losses as compared to the prior year periods. In our Workers' Compensation Insurance segment, we have experienced an increase in 2021 accident year reported losses through September 30, 2021, including increased severity-related claim activity. We believe the increase in reported losses is primarily attributable to the current pandemic conditions and the impact of workers returning to full employment with the easing of pandemic-related restrictions in our operating territories, including the impact of labor shortages on the existing workforce and, as a result, we increased our current accident year loss ratio during the third quarter of 2021.

As shown in the previous table, current accident year net loss ratios associated with the business we acquired in the NORCAL transaction were higher than the average for the other books of business in our Specialty P&C segment, which increased our consolidated current accident year net loss ratios for the three and nine months ended September 30, 2021 by 5.5 and 3.4 percentage points, respectively. Also as a result of our acquisition of NORCAL, our current accident year loss ratios for the three and nine months ended September 30, 2021 were impacted by amortization of the negative VOBA associated with NORCAL's assumed unearned premium which is recorded as a reduction to current accident year net losses and accounted for a 1.3 and 0.8 percentage point decrease, respectively, in our consolidated current period ratios. See Note 2 of the Notes to Condensed Consolidated Financial Statements for additional information on the NORCAL acquisition and the related purchase accounting adjustments. In addition, our consolidated current accident year net loss ratios for the three and nine months ended September 30, 2021 were impacted by changes in premium adjustments related to loss sensitive policies in our Specialty P&C segment which increased the current period ratios as compared to the same periods of 2020 by 1.3 and 0.5 percentage points, respectively (see previous discussion under the heading "Revenues"). For the nine months ended September 30, 2020, our consolidated current accident year loss ratio was higher due to the effect of a large national healthcare account, net of the impact of related PDR amortization, which accounted for 7.8 percentage points of the decrease in the current period ratio as compared to the prior year period. In addition, our consolidated current accident year loss ratio for the nine months ended September 30, 2020 was impacted by a $10 million IBNR reserve we recorded during the second quarter of 2020 for COVID-19 which accounted for 1.7 percentage points of the decrease in the ratio as compared to the prior year period.

In both the 2021 and 2020 three- and nine-month periods, 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 favorable development recognized during the three and nine months ended September 30, 2021 included $2.9 million and $5.0 million, respectively, related to the amortization of the purchase accounting fair value adjustment on NORCAL's assumed net reserve and amortization of the negative VOBA associated with NORCAL's DDR reserve which is recorded as a reduction to prior accident year net losses and loss adjustment expenses. We have not recognized any development related to NORCAL's prior accident year reserves since the date of acquisition during the three and nine months ended September 30, 2021. See Note 2 of the Notes to Condensed Consolidated Financial Statements for additional information on the NORCAL acquisition and the related purchase accounting adjustments. In addition, consolidated favorable development recognized for the three and nine months ended September 30, 2021 included a $1.0 million reduction in our IBNR reserve for COVID-19. Consolidated net favorable prior year reserve development recognized in the 2021 three- and nine-month periods was lower as compared to the same periods of 2020 primarily due to unfavorable development recognized in our Lloyd's Syndicates segment primarily driven by catastrophe related losses. 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. However, in our Workers' Compensation Insurance segment, we have experienced an increase in 2021 accident year reported losses through September 30, 2021 which we primarily attribute the current pandemic conditions and the impact of workers returning to full employment with the easing of pandemic-related restrictions, as previously discussed. For our Specialty P&C segment, given the consistent and prolonged nature of these favorable trends we began to recognize some of these favorable frequency trends in our HCPL current accident year reserve during the third quarter of 2021.

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 September 30						Nine Months Ended September 30
	2021		2020		Change		2021		2020	Change
Underwriting Expense Ratio
Consolidated (1)	24.5	%	30.5	%	(6.0	pts)	28.7	%